UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 000-26883
MEDSCAPE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7375 13-3879679
(State or other jurisdiction of Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
134 West 29th Street
New York, New York 10001-5399
(Address of principal
executive offices)
Registrant's telephone number, including area code: (212) 760-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X__ No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of December 31, 1999 was approximately
$254,229,040 (based on the last sale price of the registrant's common stock on
the NASDAQ National Market System on that date and, for the limited purpose of
this computation only, the assumption that all of the persons who had filed
reports of ownership pursuant to Section 16(a) of the Securities Act of 1934 in
respect of the registrant's securities are affiliates).
The number of shares of the registrant's common stock outstanding at
December 31, 1999 was 44,661,094.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission relating to the registrant's
1999 Annual Meeting of Shareholders is incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Medscape, Inc. (herein, together with its subsidiaries unless the
context otherwise requires, generally referred to as "Registrant" or "Company")
provides comprehensive, authoritative and timely medical information and
interactive programs to physicians, allied healthcare professionals and
consumers. Registrant operates two principal healthcare web sites, Medscape.com
and CBSHealthWatch.com. As of December 31, 1999, Registrant's sites had more
than 1,700,000 registered members worldwide, including over 280,000 registered
as physicians, 860,000 registered as allied health professionals and 630,000
registered as consumers.
Medscape.com is currently organized by medical specialty area, such as
oncology and cardiology, to make it easier for its members to access the
information most relevant to them. Medscape.com's medical content and
interactive programs assist medical professionals in keeping abreast of medical
advances. Medscape.com's original, exclusive and proprietary content includes
such innovative features as next day summaries of major medical conferences and
online, peer-reviewed medical journals. Medscape.com also provides proprietary
interactive programs that test a medical professional's diagnostic skills and
understanding of recent medical developments. Medscape.com provides access to
extensive online medical databases and what it believes is one of the web's
largest collections of free, peer-reviewed, full-text medical articles. In
addition, Medscape.com offers physicians the opportunity to earn continuing
medical education credits that are required by most states' licensing boards.
Through its strategic relationship with National Data Corporation (NDC), a
provider of healthcare information services and electronic commerce solutions,
Medscape.com will integrate selected clinical data interchange and data
management services provided by NDC into Medscape.com. Medscape.com will also
serve as the principal content provider to NDC's physician practice management
system and be an online distributor of some of NDC's other online clinical
products.
Registrant launched its consumer site, CBS.Medscape.com, in September
of 1999. On November 1, 1999 CBS.Medscape.com was relaunched as
CBSHealthWatch.com. CBSHealthWatch.com is designed to help families and
individuals make better-informed healthcare decisions and to simplify management
of their healthcare needs. The site provides personalized, authoritative medical
content written for the consumer, access to professional content on Medscape.com
and interactive personal health management tools, such as health diaries.
Registrant entered into a strategic relationship with CBS Corporation under
which CBSHealthWatch.com is the exclusive Internet healthcare site integrated
into CBS News programming and will be promoted on CBS media properties.
Registrant also has strategic relationships with America Online, Inc.
and Women.com Networks, Inc. Under the agreement with America Online, Inc.,
Registrant has developed co-branded consumer sites that appear and are promoted
through contextual links and banners on AOL, AOL.com, CompuServe Service,
Netscape Netcenter and Digital City, all of which are AOL properties. The AOL
co-branded sites on the AOL properties were launched in the fourth quarter of
1999 and the first quarter of 2000. Under the agreement with Women.com,
Registrant is the preferred health content partner for Women.com and provides
Women.com's visitors with health news, feature articles, proprietary health
tools and other health information in a co-branded format.
Registrant was incorporated in New York in March 1996 and commenced
operations in April 1996. Registrant was reincorporated in Delaware in December
1998. In October of 1998, Registrant acquired Healthcare Communications Group,
LLC, which operated a leading HIV web site. In the first quarter of 1999,
Registrant acquired Bonehome.com, a leading orthopedic site, and CompuRx, Inc.,
a healthcare market research company serving pharmaceutical and other healthcare
companies.
Registrant's executive offices are located at 134 West 29th Street, New
York, New York, 10001-5399. The telephone number is (212) 760-3100.
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PROPOSED MERGER WITH MEDICALOGIC
On February 21, 2000, Medscape entered into an agreement with MedicaLogic, Inc.,
an Oregon corporation that is a provider of online health records, providing for
the merger of a newly-formed subsidiary of MedicaLogic with and into Medscape,
with Medscape as the surviving corporation and, thus, becoming a wholly-owned
subsidiary of MedicaLogic. Under the terms of the agreement, each outstanding
share of common stock of Medscape will be converted into the right to receive
.323 shares of common stock of MedicaLogic. Consummation of the merger is
subject to certain condition, including (i) approval of the merger by the
stockholders of Medscape, (ii) approval by the stockholders of MedicaLogic of
the issuance of MedicaLogic common stock in the Merger and (iii) the expiration
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended. MedicaLogic has also agreed, subject to certain conditions, to
acquire Total eMed, Inc., a provider of electronic medical transcription
services, in a merger transaction for approximately eight million shares of
MedicaLogic's common stock.
THE MEDSCAPE.COM SITE
PROPRIETARY EDITORIAL CONTENT AND FEATURES
Medscape.com is currently organized into 23 medical specialty sites,
ranging from cardiology to oncology to women's health, making it easier for its
members to access the information most relevant to them. Medscape.com's
original, exclusive and proprietary content and programs, assisting medical
professionals and consumers to keep abreast of medical advances, include:
o NEXT DAY SUMMARIES(SM) of selected presentations at major medical
conferences;
o MEDSCAPE GENERAL MEDICINE, believed to be the only online peer-reviewed
general medical journal;
o CLINICAL MANAGEMENT SERIES, offering interactive practice modules with
state-of the art treatment information and clinical cases for
particular cases, each of which is accredited for continuing medical
education;
o TREATMENT UPDATES, with authoritative evaluations of significant new
changes in therapies; and
o EMED JOURNALS, peer-reviewed, electronic medical journals written
exclusively for medscape.com covering a number of important specialty
areas.
Medscape.com also offers an array of proprietary, challenging and
instructional interactive features to test a physician's medical knowledge.
Interactive self-assessment elements include:
o PICTOURS(R), image-based case challenges testing the physician's
diagnostic skills;
o TODAY'S QUESTION, testing the physician's understanding of recent
developments in the physician's medical specialty; and
o ECG OF THE WEEK, images of cardiograms with case histories testing the
physician's diagnostic skills, supplied by leading cardiologists.
THIRD-PARTY EDITORIAL CONTENT
Registrant believes that Medscape.com contains one of the web's largest
collections of free, peer-reviewed, full-text medical articles and one of the
web's most extensive libraries of continuing medical education accredited
programs. Medscape.com also provides third-party access to the NATIONAL DRUG
DATA FILE, a leading drug and disease database of Hearst Corporation's First
DataBank.
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Numerous prestigious medical publishers, universities, hospitals and
professional organizations are part of Medscape.com's strategic content partner
program known as Medscape Publishers' Circle(R). Through this program,
Medscape.com aggregates, organizes, and places in context content from over 100
medical journals, textbooks, news services and other publications, and offers
integrated, easy-to-use searching of vast medical databases, including over nine
million abstracts of medical journals available in the National Library of
Medicine's MEDLINE, AIDSLINE and TOXLINE databases. In addition, through an
agreement with Dow Jones & Company, Medscape.com provides free searching of more
than 500 leading medical publications, including the JOURNAL OF THE AMERICAN
MEDICAL ASSOCIATION, the BRITISH MEDICAL JOURNAL, THE LANCET, and abstracts from
the NEW ENGLAND JOURNAL OF MEDICINE. Members can immediately retrieve online a
full-text copy of the article or abstract for a fee.
NON-MEDICAL CONTENT
Registrant also provides an array of non-medical content on subjects of
particular interest to medical professionals and health-conscious consumers.
MEDSCAPE MONEY & MEDICINE offers personal finance features, including stock
quotes, portfolio tracking and business news, and valuable practice management
features that provide business information that is directly relevant to a
medical practice. Members can also learn about the developments in managed care
in a special MANAGED CARE topic area. The MEDSCAPE HUMOR & MEDICINE section
provides readers with medical jokes, cartoons, DEFUNITIONS, crossword puzzles
and other entertaining features that generate traffic to and increase usage of
Registrant's site.
MEMBER SERVICES
Registrant offers a number of services that complement its high-quality
content offerings and make Medscape.com a preferred professional destination
site, including:
CONTINUING MEDICAL EDUCATION. Approximately half the states require
physicians and selected other medical professionals to certify annually that
they have accumulated a minimum number of continuing medical education hours to
maintain licensure. Medscape.com offers its professional members what it
believes is one of the web's largest libraries of continuing medical education
programs. Medscape.com's extensive continuing medical education programs are
produced in association with entities accredited by the Accreditation Council
for Continuing Medical Education. From the convenience of their home or office
computer, Medscape.com's professional members can obtain continuing medical
education credits by accessing a variety of accredited editorial resources and
programs including online journal articles, NEXT DAY SUMMARIES of medical
conferences, in-depth TREATMENT UPDATES and state-of-the-art CLINICAL MANAGEMENT
SERIES.
MEDICAL OFFICE MANAGEMENT. Through its strategic relationship with
National Data Corporation, Registrant provides seamless web connectivity into
NDC's online clinical information products and EDI services, including claims
processing.
PHYSICIAN WEB SITES. Medscape.com offers it members registered as
physicians the opportunity to create home pages for their medical practices that
can be accessed by their patients and the general public. In addition to details
about their practice, including office address, phone number, medical specialty,
types of insurance accepted, hospital affiliations and languages spoken,
Medscape.com's PHYSICIAN WEB SITES permit a physician to offer links to
disease-specific information from Medscape.com as well as the general searching
capability of Medscape.com. Registrant believes these PHYSICIAN WEB SITES will
keep Registrant's high-quality medical information at the center of the
communication between physician and patient, and keep the physician at the
center of the healthcare dialogue. As of December 31, 1999, over 8,500 PHYSICIAN
WEB SITES had been established.
E-COMMERCE AND SERVICES. Through a series of strategic partners,
Registrant offers its audience the opportunity to purchase a variety of goods
and services. The MEDSCAPE MEDBOOKSTORE offers members the opportunity to
purchase discounted medical texts from a collection of over 90,000 titles
through its partner MedSite Publishing Inc. The MEDSCAPE JOB CENTER offers a
comprehensive job-listing/posting service for medical professionals through its
partner NetMed, Inc. The MEDSCAPE DRUGSTORE offers Medscape.com members the
ability to purchase online a wide range of health, beauty and wellness products
through drugstore.com.
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COMMUNITY FEATURES. MEDSCAPE MAIL, powered by CommTouch, is useful for
mobile professionals like physicians, who often require email access from
multiple locations, such as their homes, offices, clinics and hospitals or
during travel. Discussion areas on many medical articles and physician-only
discussion groups are also available. Medscape.com's ASK-THE-EXPERT feature
allows members registered as physicians to present interesting cases to leading
experts online for comments.
MEDSCAPE'S HEALTHCARE COMPANY SERVICES
Medscape.com offers healthcare companies many value-added online
services including:
MEDSCAPE PROFILES. The Internet offers significant advantages over
traditional mail surveys and focus groups in terms of speed and cost savings.
U.S. pharmaceutical and other healthcare companies are estimated to spend as
much as $1 billion annually on custom and syndicated market research. MEDSCAPE
PROFILES, an online market research division, has already successfully piloted
several custom research projects and has recruited a physician panel of over
1,000 from Medscape.com's member base to conduct custom and syndicated online
research quickly and efficiently.
MEDSCAPE MEDPYX. Medscape.com plans to introduce MEDSCAPE MEDPYX as an
educational research program that will assist pharmaceutical companies in better
understanding the physician's knowledge base and prescribing patterns. In 1998,
pharmaceutical company sales representatives conducted more than 59 million
details to office- and hospital-based physicians. Registrant believes that
MEDSCAPE MEDPYX will provide pharmaceutical companies with a cost-effective
method of evaluating and improving their existing detailing activities.
A PROFILE OF CBSHEALTHWATCH.COM
Registrant designed its CBSHealthWatch.com and AOL co-branded consumer
sites to help consumers make better-informed healthcare decisions and to
simplify management of their healthcare needs. Registrant's consumer sites
provide personalized, authoritative medical content written for the consumer,
access to its professional content on Medscape.com and interactive personal
health management tools, such as health diaries.
In addition to general health and wellness information,
CBSHealthWatch.com and the AOL co-branded sites offer information organized
around specific health conditions, such as diabetes or asthma. In an effort to
simplify the consumer experience, Registrant includes convenient links to health
sites operated by the consumer's physician, and plans to expand these linkages
to cover employers and health insurers.
RELATIONSHIP WITH CBS CORPORATION
On August 3, 1999, Registrant entered into an agreement with CBS
Corporation under which it will receive approximately $150 million in
advertising and promotion in the United States over a seven-year period.
Registrant also was granted a license to the "CBS" trademark and "Eye" design
and selected health-related news content that, together, were valued at $7
million.
CBSHealthWatch.com is the exclusive healthcare Internet site integrated
into CBS News programming. This integration is being accomplished by CBS News,
when appropriate and at its discretion, directing viewers of CBS News programs
to CBSHealthWatch.com for more information regarding health-related news stories
and features, and by using Registrant's story ideas and sources in health
stories developed and broadcast by CBS News.
ORIGINAL AND THIRD-PARTY CONTENT
In addition to general health and wellness information, CBSHealthWatch
provides consumers with original and third party news, feature articles and
other information organized around specific health conditions, such as diabetes
or asthma, grouped into "health channels." The site contained 22 such channels
at launch and expanded that number to 39 in the first quarter of 2000. Members
may customize their home page by creating MY HEALTH CHANNELS, with tailored
information from up to three channels.
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Members also have access to three different levels of information not
usually found on consumer health sites: BASIC, ADVANCED and WHAT MY DOCTOR
READS. The third level offers consumers information from the Medscape.com
professional site that is used by their own physicians. It is also a gateway for
consumers to reach all of the extensive content and features Medscape.com
provides to health professionals.
The extensive Library feature on CBSHealthWatch.com offers these
sources of information, including a number that are also found on Registrant's
professional site:
o HEALTH TOPICS A-Z, allowing consumers to access the world of health by
entering a word or phrase, or using the keyword list of common terms;
o DRUG DIRECTORY, for facts on over 10,000 brand name and generic drugs;
o MEDICAL DICTIONARY from Merriam-Webster;
o MEDICAL TEST HANDBOOK from the Yale University School of Medicine;
o MEDLINE, AIDSLINE and TOXLINE, three comprehensive medical databases
from the National Library of Medicine;
o SELF CARE & FIRST AID, providing a search by symptom or condition;
o WHAT MY DOCTOR READS, offering direct access to information used by
medical professionals;
o COMMUNITY ORGANIZATIONS, with contact information on national
organizations, government agencies, medical experts and key groups in
healthcare;
o AUDIO ARCHIVE, including recorded interviews with physicians and their
patients on a wide variety of topics;
o MANAGED CARE GUIDE, with information on this important subject;
o MINI MEDICAL SCHOOL, with courses offered by Emory University; and
o RELATED SITES, to take consumers to other health resources on the web.
INTERACTIVE FEATURES AND TOOLS
CBSHealthWatch's easy-to-use interactive HEALTH MANAGER allows
registered members to create and monitor a personal health calendar, log meals,
track appointments, set an exercise plan and track weight and medications. There
are also special features for certain health conditions. For example, diabetics
can track key information like blood sugar readings.
The site also provides a number of "community" features allowing
registered members to communicate directly with medical experts and other
individuals with similar health interests. For example, the ASK AN EXPERT
section can be used to pose a health question or check answers to frequently
asked questions. HEALTH MATES permits members to communicate with one another
regularly on health conditions and interests. IN YOUR OWN WORDS encourages
members to share insights and views with others.
REGISTERED MEMBERS
To utilize all of the features of Medscape.com and CBSHealthWatch.com,
users must register as members. This information enables Registrant to deliver
targeted medical content based on its members' registration profiles. As of
December 31, 1999, Medscape.com had over 1,700,000 registered members worldwide,
including over 280,000 members registered as physicians, 860,000 registered as
allied healthcare professionals and 630,000 registered as consumers.
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The registration process enables professional members to choose a home
page tailored to their medical specialty or interest. Accordingly, a
cardiologist accessing Medscape.com is automatically directed to MEDSCAPE
CARDIOLOGY, rather than a more generic home page. Every member, however,
regardless of medical specialty or professional status, has access to the full
suite of exclusive, original and licensed content through a uniform, easy-to-use
interface.
To encourage initial use, CBSHealthWatch.com allows visitors to access
selected features without registering as members. Visitors, however, have to
register as members to have access to all the features of CBSHealthWatch.com,
including the interactive programs such as health diaries.
EDITORIAL, DESIGN AND PRODUCTION
Registrant's editorial staff is headed by Dr. George D. Lundberg,
Registrant's Editor in Chief, who was formerly Editor of the JOURNAL OF THE
AMERICAN MEDICAL ASSOCIATION for 17 years. As of December 31, 1999, Registrant's
editorial, design and production staff consisted of 82 professionals who are all
experienced medical editors, writers and producers. Registrant intends to
significantly increase its number of medical specialty areas. Registrant has
assembled specialty-specific editorial boards for Medscape.com and has also
assembled a Medscape.com scientific advisory board consisting of 19 of the
world's leading physicians, academicians, clinicians and ethicists, and
healthcare experts, who also serve as the editorial board of MEDSCAPE GENERAL
MEDICINE.
Registrant has an easy-to-use interface that incorporates original and
proprietary content written by medical experts with an extensive library of
licensed content and medical databases. Each medical specialty area is headed by
a program director responsible for building and continuously updating that
area's content. Registrant's goal is to be the premier online information
resource in each of its medical specialty areas. To support this effort,
Registrant covers major medical conferences in many specialties with its editors
and medical experts summarizing and reporting on the breaking medical research
and news delivered at these events.
SALES
As of December 31, 1999, Registrant had a direct sales organization of
over 35 sales professionals and sales operations staff employees. Registrant
generally seeks to hire individuals with significant experience selling to
pharmaceutical, other healthcare and consumer companies and their advertising
agencies.
MARKETING AND PUBLIC RELATIONS
Registrant employs a variety of methods to promote the Medscape brand
and to attract traffic and new members, including advertising on other Internet
sites and in medical journals, pharmaceutical and other healthcare publications,
and other targeted publications. Registrant is currently using the approximately
$150 million in advertising and promotion from CBS to promote Medscape on CBS
media properties, including television, radio and outdoor advertising.
Registrant also is extending the reach of CBSHealthWatch.com through its
agreements for co-branded sites and information with AOL and Women.com.
Registrant also maintains a significant presence at major industry
conferences, trade shows and medical meetings, primarily through the operation
of large exhibits for both the professional and consumer sites. Registrant
supplements these efforts with direct mail campaigns targeted at medical
professionals.
Registrant's professional distribution strategy is designed to have
Medscape.com's medical content be available within major Internet-accessible
healthcare information system platforms like hospital intranets, electronic
medical record systems and physician practice management company intranets. This
strategy integrates Medscape.com into the daily workflow of their medical
professionals with frequent reminders of and easy access to Registrant's
selection of medical content. Consistent with this strategy, in 1998, Registrant
signed a content distribution agreement with PhyCor, the largest physician
practice management organization in the United States. In August 1999,
Registrant entered into a License and Product Development Agreement with
National Data Corporation under which Registrant is the preferred content
supplier to NDC's LYTEC physician practice management product and an online
distributor of some of NDC's other clinical information products.
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Registrant's internal public relations staff oversees a comprehensive
public and investor relations program, which it believes is a key component of
its marketing and brand recognition strategy. Registrant targets key business,
medical and healthcare marketing publications, and encourages their reporters to
use Medscape.com and CBSHealthWatch.com for their medical news and research
needs, in an effort to build both brand awareness and loyalty among news
organizations.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Registrant's business is supported by a reliable, expandable and secure
system platform. Using a combination of proprietary online solutions and
commercially available licensed technologies, Registrant has deployed systems
for online content dissemination, site analysis, and web- and email-based member
support.
Registrant has developed a database management and online publication
system to index, retrieve and display information. This system allows for rapid
searching, viewing and distribution of content including text, photos, graphics
and other images. Registrant's hardware and software systems are based on a
distributed processing model that allows applications to be distributed among
multiple parallel servers. Registrant's hardware servers, storage systems,
Internet connections and networks allow its online systems to operate
continuously 24 hours a day and seven days a week.
Registrant maintains offsite redundant systems and facilities.
Registrant has outsourced its web-hosting operations to a third party facility,
Exodus Communications. This outsourcing provides faster and more reliable
connections to the Internet and enhanced reliability and expandability.
COMPETITION
Registrant faces competition both in attracting visitor traffic and in
generating revenue across all its business lines. Registrant competes with
numerous companies and organizations for the attention of medical professionals
and consumers including traditional off-line media such as print journals,
conferences, continuing medical education programs and symposia. Registrant also
faces significant competition from online information resources. There are
thousands of healthcare-related sites on the Internet. Also, several large
consumer sites offer specialized healthcare channels as part of their general
services. In addition, there are many companies that provide non-Internet based
marketing and advertising services to the healthcare industry. These competitors
include advertising agencies, consulting firms, marketing and communications
companies and contract sales and marketing organizations.
Some of Registrant's current and potential competitors may have
competitive advantages compared to Registrant, including:
o greater resources to devote to the development, promotion and
sale of their services;
o greater financial, technical and marketing resources;
o greater brand recognition and larger marketing budgets; and
o larger customer and user bases.
Registrant believes that the principal competitive factors in
attracting and retaining members are the depth, breadth and timeliness of
services and brand recognition. Other important factors in attracting and
retaining members include ease of use, quality of service and cost. Registrant
believes that the principal competitive factors that will continue to attract
advertisers and sponsors to Medscape.com and its consumer sites include price,
the number of medical professionals and consumers who use Registrant's web
sites, the demographics of its member base and the creative implementation of
advertisement placements.
Competition is likely to increase significantly as new companies enter
the market and current competitors expand their services. There can be no
assurance that Registrant will be able to compete successfully against current
and future competitors or that the competitive pressures Registrant faces will
not seriously harm its business.
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SIGNIFICANT CUSTOMERS
Registrant sells advertising and sponsorships, market research and
other services to pharmaceutical, medical device and other healthcare companies,
as well as advertising and sponsorships to consumer products and other
consumer-oriented companies. Registrant also sells products, such as medical
books, to physicians, allied healthcare professionals and consumers.
During 1999, Registrant's client and revenue base broadened during the
year. In 1998, Registrant derived approximately 48% of its revenue from three
leading pharmaceutical advertisers and sponsors, of which two accounts were
individually greater than 10%.
In 1999 no individual client comprised more than 10% of Medscape's revenue.
INTELLECTUAL PROPERTY AND DOMAIN NAME
Registrant protects its intellectual property through a combination of
license agreements, trademark, service mark, copyright and trade secret laws and
other methods. Registrant obtains the majority of its content under license
agreements with publishers, through assignments or work for hire arrangements
with third parties and from internal staff development. Generally, Registrant's
license agreements are for a period of one to three years and it considers the
materials obtained through these agreements as important to the continued
enhancement of the content on its web site. Registrant currently has no patents
or patents pending for its online services and does not anticipate that patents
will become a significant part of its intellectual property in the foreseeable
future. Registrant also enters into confidentiality agreements with its
employees, consultants, vendors and customers and license agreements with third
parties and it generally seeks to control access to and distribution of its
technology, documentation and other proprietary information.
Registrant currently holds a number of domain names, including the
following: medscape.com, cbshealthwatch.com, cbsmedscape.com, medscape.co.uk,
medpulse.com, medicalogicmedscape.com, and medscapemedicalogic.com. Registrant
also has applications for numerous domain names pending. The legal status of
intellectual property on the Internet is currently subject to various
uncertainties. The current system for registering, allocating and managing
domain names has been the subject of litigation and proposed regulatory reform.
Additionally, legislative proposals have been made by the federal government
that would afford broader protection to owners of databases of information, such
as stock quotes. This protection of databases already exists in the European
Union.
EMPLOYEES
As of December 31, 1999, Registrant had 203 full-time employees. None
of Registrant's employees is covered by a collective bargaining agreement.
Registrant considers its employee relations to be good.
ITEM 2. PROPERTIES
Registrant is headquartered in New York, New York, where it leases a
total of approximately 91,600 square feet of office space under numerous leases.
Currently, Registrant has approximately 20,000 square feet of office space at
134 West 29th Street, New York, New York, 10001 under three leases, that
expire on June 30, 2004. Registrant also currently occupies 12,200 square feet
at 224 West 30th Street, New York, New York 10001 under two leases for
approximately 71,600 square feet. The two leases terminate on January 31, 2005.
Registrant is in the process of renovating the space at 224 West 30th Street to
ensure that it is able to meet its business and technological needs as it grows.
Registrant will relocate its corporate headquarters to 224 West 30th Street, New
York, New York 10001 once the renovations are complete. Registrant expects to
spend approximately $4 million in 2000 on these renovations.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which Registrant is a party.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of Registrant's 1999 fiscal year.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position
<S>> <C> <C>
Paul T. Sheils 45 President, Chief Executive Officer and Director.
Mr. Sheils has been a member of the Board of Registrant and
Chief Executive Officer since February of 1998. Prior to
that, he was Vice President of Dow Jones Interactive
Publishing from 1994 to February of 1998 and was Executive
Director from 1993 to 1994.
Peter M. Frishauf 50 Executive Committee Chairman, Founder and Director. Mr.
Frishauf has been a member of the Board of Registrant since
April of 1996 and Executive Committee Chairman since February
of 1998. From April 1996 through February 1998, Mr. Frishauf
served as the Chief Executive Officer of Medscape. Prior to
founding Registrant, Mr. Frishauf founded SCP Communications,
Inc., a medical publishing, education and clinical trial
company, and served as SCP's President and Chief Executive
Officer until April 1996. Mr. Frishauf continues to serve on
the board of directors of SCP Communications, Inc.
Jeffrey L. Drezner M.D., Ph.D. 52 Executive Vice President.
Dr. Drezner has been a member of the Board of Registrant
until he resigned in March of 2000. Dr. Drezner has been the
Executive Vice President since Registrant acquired Healthcare
Communications Group LLC in October of 1998. Dr. Drezner
founded Healthcare Communications Group, LLC in 1995. From
1992 to 1995, Dr. Drezner was Vice President of Clinical
Programs at Homedco, Inc., a home and alternate-site
healthcare delivery company. In 1987, Dr. Drezner founded
Integrated Care Systems, Inc., an HIV-focused, alternate-site
healthcare delivery company. Prior to 1987, Dr. Drezner
practiced medicine for fourteen years.
Steven R. Kalin 35 Chief Operating Officer, Chief Financial Officer and
Treasurer. Mr. Kalin has been Chief Operating Officer and
Chief Financial Officer of Registrant since October of 1998.
From 1995 to October of 1998, Mr. Kalin was Vice President of
Business Development at ESPN Internet Ventures. Prior to
that, Mr. Kalin was a Senior Engagement Manager with McKinsey
& Co., specializing in the media industry, for five years.
George D. Lundberg, M.D. 66 Editor in Chief.
Dr. Lundberg has been Editor in Chief of Registrant since
February of 1999. Prior to that, Dr. Lundberg served as
Editor of the JOURNAL OF THE AMERICAN MEDICAL ASSOCIATION and
also served as the Editor in Chief of SCIENTIFIC INFORMATION and
</TABLE>
10
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<TABLE>
<CAPTION>
<S> <C> <C>
MULTIMEDIA, a publication of the American Medical
Association, for seventeen years.
David Yakimischak 38 Chief Technology Officer.
Mr. Yakimischak has been the Chief Technology Officer of
Registrant since March of 1999. Prior to that, Mr.
Yakimischak was the Director of Product Development at Dow
Jones Interactive Publishing for five years.
Mark E. Boulding 39 General Counsel and Vice President of Regulatory Affairs and
Secretary. Mr. Boulding has been the General Counsel and Vice
President of Regulatory Affairs and Secretary of Registrant
since June of 1999. From 1998 to June of 1999, Mr. Boulding
was a partner of Long Aldridge & Norman LLP. Prior to that,
Mr. Boulding was an associate and then a partner with the
firm of Fox, Bennett & Turner in Washington, D.C. for seven
years. Mr. Boulding is a co-founder and sits on the board of
directors of the Internet Healthcare Coalition and is the
co-chair of the Internet Law Subcommittee of the American Bar
Association's Cyberspace Law Committee.
Anthony Plesner 41 Vice President of Finance and Corporate Development and
Assistant Treasurer. Mr. Plesner has been the Vice President
of Finance and Corporate Development and Assistant Treasurer
of Registrant since March of 1999. From 1998 to March of
1999, Mr. Plesner was the Founder and President of Niche
Consulting. From 1997 to 1998, Mr. Plesner was Chief
Financial Officer of Confer Software, Inc. (f/k/a Araxsys,
Inc.). Prior to that, Mr. Plesner was for twelve years the
Chief Financial Officer and Vice President of Business
Development at Reuters Health Information Services, Inc., a
subsidiary of Reuters PLC.
</TABLE>
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Registrant's common stock, par value $.01 per share, has been traded on
the NASDAQ National Market under the symbol "MSCP" since September 27, 1999.
Prior to that date, there was no public market for the Company's stock and,
therefore, no quoted market prices for the Company's common stock are available
prior to such date. The following table sets forth, for the period indicated,
the range of high and low per share closing prices for the common stock as
reported by NASDAQ. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily reflect actual
transactions.
IPO Price: $8.00 (9/27/99)
Q4 1999 High: $12 1/8
Q4 1999 Low: $8 1/2
Q4 1999 Close: $10.00
As of February 24, 2000, the Company had 152 holders of record of its
common stock.
DIVIDEND POLICY
The Company has not paid any dividends to holders of its common stock.
The Company intends to retain any earnings to finance the development and
expansion of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future. Any declaration and payment of dividends
would be subject to the discretion of the Company's board of directors. Any
future determination to pay dividends will depend on the Company's results of
operations, financial condition, capital requirements, contractual restrictions
and other factors deemed relevant at the time by the board of directors.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF REGISTRANT
The following selected consolidated financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Registrant" and the consolidated financial statements and notes of
Registrant that are included in this document. The following information has
been derived from the audited consolidated financial statements of Registrant
beginning on page 21:
o consolidated statements of operations data for each of the years in the
three-year period ended December 31, 1999; and
o consolidated balance sheet data as of December 31, 1998 and 1999.
The following information has been derived from the audited consolidated
financial statements of Registrant not included in this document:
o consolidated statement of operations data for the nine months ended
December 31, 1996; and
o consolidated balance sheet data as of December 31, 1997.
The reader is encouraged to read the consolidated financial statements
included in this document. Historical results of operations are not necessarily
indicative of future results.
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------------
1996 1997 1998 1999
------------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues.......................................... $ 1,015 $ 1,522 $ 3,069 $ 11,156
------------- ------------ ------------ ------------
Operating expenses:
Editorial, production, content and
technology (excludes stock-based
compensation expense of $166 in ..... 1,182 1,967 2,694 12,967
1999 and $26 in 1998 included
below)
Sales and marketing
(excludes stock-based
compensation expense of $83 in ...... 278 1,397 2,520 26,944
1999 included below)
General and administrative
(excludes stock-based compensation
expense of $1,852 in 1999 and ....... 830 1,450 1,469 6,048
$223 in 1998 included below)
Depreciation and amortization ........... 41 160 287 1,010
Stock-based compensation ................ -- -- 249 2,101
------------- ------------ ------------ ------------
Total operating expenses ......................... 2,331 4,974 7,219 49,070
------------- ------------ ------------ ------------
Loss from operations ............................. (1,316) (3,452) (4,150) (37,914)
Interest expense (income) ............... 28 12 (249) (1,203)
------------- ------------ ------------ ------------
Net loss ................................ $ (1,344) $ (3,464) $ (3,901) $ (36,711)
============= ============ ============ ============
Basic loss per share(1)........................... $ (0.66) $ (1.26) $ (1.07) $ (1.89)
Weighted average number of shares of common
stock outstanding ....................... 2,026,233 2,750,552 3,636,558 19,400,443
</TABLE>
DECEMBER 31,
----------------------------------
1997 1998 1999
CONSOLIDATED BALANCE SHEET DATA: --------- --------- ---------
Current assets............................ $ 4,294 $ 3,038 $ 62,021
Working capital........................... 2,350 1,368 50,874
Total assets.............................. 4,633 5,874 85,335
Stockholders' equity...................... 2,689 4,204 74,188
- ---------------
(1) Registrant calculates loss per common share by dividing the loss
attributable to common shares by the weighted average number of shares
outstanding. It does not include outstanding common stock options and
warrants in the loss per common share calculation as their effect is
anti-dilutive.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Registrant operates Medscape.com, a healthcare web site for physicians
and allied healthcare professionals, such as pharmacists and nurses. To enhance
and personalize the consumer experience, Registrant launched a separate consumer
site, CBS.Medscape.com, in the third quarter of 1999. On November 1, 1999,
CBS.Medscape.com was relaunched as CBSHealthWatch.com. Registrant developed and
launched several additional co-branded consumer sites in the fourth quarter of
1999 and the first quarter of 2000 under an agreement with America Online, Inc.
Registrant commenced operations in April 1996. In October 1998,
Registrant acquired Healthcare Communications Group, LLC, which operated a
leading HIV web site. In the first quarter of 1999, Registrant acquired the
trademarks and hired key employees of Bonehome.com, a leading orthopedic web
site, and CompuRx, Inc., a healthcare market research company serving
pharmaceutical and other healthcare companies. The Bonehome.com and CompuRx
transactions were not material to Registrant's financial statements. These
transactions are consistent with Registrant's strategy to be the leading online
information source for selected medical specialties and to broaden its revenue
streams.
Since its inception, Registrant has derived substantially all of its
revenues from advertising and sponsorships from pharmaceutical companies.
Registrant also generates revenues from its e-commerce partners who either
provide it with a placement fee or a commission on sales of their products
generated through Registrant's web sites. Registrant offers banner advertising
to third-party advertisers and generally guarantees delivery of a specified
number of advertising impressions. Registrant derives sponsorship revenues from
the development of client-sponsored content, including modules on disease topics
and editorial coverage of medical conferences. Registrant expects its revenues
to be seasonal due to the scheduling of major medical conferences.
Registrant recognizes banner advertising revenues in the period that it
displays the advertisement, provided that no significant obligations remain and
collection of the resulting receivable is probable. Registrant recognizes
revenues from modules on a cost-of-completion basis and editorial coverage of
medical conferences in the period in which the conference was held. Registrant
recognizes revenues from e-commerce based on commissions when earned from its
third-party partners or, in cases where third-party partners pay placement fees
to it, over the life of the product placement. Registrant generally invoices for
its services at the inception of a project and records a receivable.
Accordingly, Registrant's receivables have increased in connection with its
increase in revenues and due to an increase in the number of large scale
sponsored programs which have become a more prominent part of its business
following its acquisition of Healthcare Communications Group.
To date, Registrant has incurred substantial costs to create and
enhance its content, build brand awareness, develop its infrastructure and grow
its business, and has yet to achieve significant revenue. As a result,
Registrant has incurred operating losses in each fiscal quarter since it was
formed. Registrant expects operating losses and negative cash flow to continue
for the foreseeable future as it intends to significantly increase its operating
expenses to grow its business. These costs could have an adverse effect on its
future financial condition and operating results. Registrant believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and you should not rely upon them as an indication of its future
performance.
RESULTS OF OPERATIONS
REVENUE AND EXPENSE COMPONENTS
The following descriptions of the components of revenues and expenses
apply to the comparisons of results of operations:
REVENUES. Revenues consist primarily of sales of advertising banners
and sponsorships for developing content for modules and medical conferences.
Revenues also include commission revenues or placement fees from
15
<PAGE>
product sales, such as medical books, and market research services to
pharmaceutical and other healthcare companies.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development
expenses consist primarily of salaries, third-party content acquisition costs,
the development of sponsored content and expenditures associated with
maintaining and enhancing its web sites.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, promotions and related marketing costs.
GENERAL AND ADMINISTRATION. General and administration expenses consist
primarily of salaries, facility costs and fees for professional services.
DEPRECIATION AND AMORTIZATION. Depreciation expense reflects the charge
for depreciation of capitalized fixed assets, including computer equipment, web
site servers and related equipment, and the amortization of office leasehold
improvements. Additionally, this category includes goodwill amortization related
to corporate acquisitions.
INTEREST EXPENSE/INCOME. Interest expense is related to loans that a
related party provided to Registrant, which were fully repaid by the end of
1998. Interest income consists primarily of interest earned on cash and cash
equivalents invested in money market funds.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues and operating expenses for the year ended December 31, 1999
include Healthcare Communications Group, which Registrant acquired in October
1998.
REVENUES. Revenues increased 264% to $11.2 million for the year ended
December 31, 1999 from $3.1 million in 1998. The increase in revenues was driven
by an increased advertiser and sponsor base and an expansion of product lines
resulting from the acquisition of Healthcare Communications Group in October
1998.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development,
content and technology expenses increased 381% to $13.0 million for the year
ended December 31, 1999 from $2.7 million in 1998. The increase in costs was
primarily due to increased variable production costs related to the growth of
sponsored content revenues, costs associated with expanding and enhancing
editorial content, an increase in the number of employees in Registrant's
Editorial and Information Technology groups and associated recruitment costs,
and costs incurred in upgrading the functionality of Registrant's web sites and
its internal networks. A significant portion of the 1999 cost increase reflects
building-out core infrastructure across the different functions to support new
initiatives and the future growth of the business.
SALES AND MARKETING. Sales and marketing expenses increased 969% to
$26.9 million for the year ended December 31, 1999 from $2.5 million in 1998.
The increase in costs was primarily due to increased costs related to the
continued development and implementation of Registrant's marketing and branding
campaigns, the commencement of marketing activities associated with its
agreements with CBS, NDC and AOL, as well as additional sales and marketing
personnel. Of the $26.9 million incurred in 1999, $8.4 million relates to
non-cash expenses for the utilization of advertising and other services
contributed by CBS and NDC in exchange for equity in Registrant. In 1998, there
were no such non-cash expenditures.
GENERAL AND ADMINISTRATION. General and administration expenses
increased 312% to $6.0 million for the year ended December 31, 1999 from $1.5
million in 1998. The increase in costs was primarily a result of expenses
related to increased personnel and other employee compensation expenses,
professional service fees, and facility expenses necessary to support
Registrant's growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 252% to $1.0 million for the year ended December 31, 1999 from
$287,000 in 1998. The increase in costs was attributable to increased
depreciation expense resulting from increased purchases of fixed assets,
capitalized software development costs
16
<PAGE>
associated with CBSHealthWatch.com and full-year impact of amortization of
goodwill related to the Healthcare Communications Group acquisition in October
1998.
STOCK-BASED COMPENSATION. In connection with the issuance of stock
options during the second half of 1998 and the first half of 1999, an amount
equal to the excess of the fair market value of Registrant's common stock over
the option exercise prices is being amortized over four years, the vesting
period of the options. The amortization commenced in the fourth quarter of 1998.
Additionally, deferred stock compensation includes the amortization of the fair
value of the warrants issued to AOL.
INTEREST EXPENSE / INCOME. Net interest income for the year ended
December 31, 1999 was $1.2 million compared to $249,000 in 1998. The higher
interest income was due to a higher average of net cash and cash equivalents
balance as a result of Registrant's financing activities in 1999.
INCOME TAXES. As of December 31, 1999, Registrant had federal net
operating loss carryforwards of approximately $44.3 million that will be
available to reduce future taxable income. The federal net operating loss
carryforwards expire beginning in 2011 through 2019. A valuation allowance has
been recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset due to Registrant's lack of earnings
history.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Operating results for the year ended December 31, 1998 include the
results of Healthcare Communications Group, which Registrant acquired in October
1998.
REVENUES. Revenues increased 102% from $1.5 million for the year ended
December 31, 1997 to $3.1 million for the year ended December 31, 1998. The
increase in revenues was driven by the inclusion of Healthcare Communications
Group revenues for November and December 1998 and an increase in the number of
advertisers and sponsors on Registrant's web sites. Advertising and sponsorship
revenues, for both comparison periods, comprise more than 98% of total revenues.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development
expenses increased 37% from $2.0 million for the year ended December 31, 1997 to
$2.7 million for the year ended December 31, 1998. The increase in costs was
primarily due to increased variable costs associated with the development of
sponsored content, as well as from additional editorial, production and
technology personnel.
SALES AND MARKETING. Sales and marketing expenses increased 80% from
$1.4 million for the year ended December 31, 1997 to $2.5 million for the year
ended December 31, 1998. The increase in costs was primarily due to an expansion
of Registrant's sales force and client services staff and costs related to
marketing and branding campaigns.
GENERAL AND ADMINISTRATION. General and administration expenses
remained flat at $1.5 million for the year ended December 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 79% from $160,000 for the year ended December 31, 1997 to $287,000 for
the year ended December 31, 1998. The increase in costs was largely attributable
to increased purchases of fixed assets and amortization of goodwill resulting
from the Healthcare Communications Group acquisition in October 1998.
INTEREST EXPENSE/INCOME. Net interest expense for the year ended
December 31, 1997 was $12,000. Net interest income for the year ended December
31, 1998 was $249,000. The improvement was due to higher average net cash and
cash equivalents balances as a result of the issuance of preferred stock at the
end of 1997 and in 1998, as well as the payment in full of all outstanding loans
in 1998.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Registrant has largely financed its operations
through the private placement of equity securities and, to a lesser extent, from
revenues generated from advertising and sponsorship sales and loans received
from a related party.
On March 5, 1999, Registrant completed a private placement of 1,757,683
shares of Series D preferred stock to 15 accredited investors for which it
received net proceeds, after deducting offering costs, of approximately $19.4
million.
On August 3, 1999, Registrant entered into agreements with CBS
Corporation under which, during the following seven years, CBS agreed to give
Registrant approximately $150 million in advertising and promotion in the United
States and a license to the "CBS" trademark and "Eye" design and selected
health-related news content in exchange for 13,938,368 shares of its common
stock, which represented approximately 32% of its outstanding capital stock upon
completion of the initial public offering in September 1999.
On August 4, 1999, Registrant entered into a strategic development and
marketing agreement with National Data Corporation, an electronic data
interchange and data management company for medical practices. As part of this
transaction, NDC invested $10 million cash in Registrant, and agreed, over the
three year term of the agreement, to provide $10 million in licensing and
promotional value and credits against future commission and product purchase
amounts due by Registrant to NDC. Of this amount, $6,000,000 will be expensed as
used over the three-year life of the agreement, commencing August 4, 1999 and
terminating August 31, 2002. In addition, the license fee of $4,000,000 will be
amortized on a straight line basis over the life of the agreement. Under the
agreement, NDC received 1,000,000 shares of Registrant's common stock and
400,000 shares of Registrant's Series E preferred stock. The 400,000 shares of
Series E preferred stock converted into 1,250,000 shares of Registrant's common
stock upon completion of Registrant's initial public offering in September 1999.
In accordance with instructions by NDC, 25,000 of the 1,000,000 shares of common
stock and 10,000 of the 400,000 shares of Series E preferred stock were
delivered to NDC's financial advisor in the transaction, Lazard Freres & Co.,
LLC.
On September 27, 1999, Registrant completed an initial public offering
that ultimately, after inclusion of the exercise on September 30, 1999 of the
900,000-share underwriters' over-allotment, resulted in the issuance of
7,650,000 shares of common stock. Net proceeds received, after deducting
offering costs, totaled approximately $54.4 million, including approximately
$6.7 million received on October 5, 1999 from the exercise of the
over-allotment.
Net cash used in operating activities was $3.6 million, $4.2 million
and $32.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Cash used in operating activities for all periods was attributable
to funding net operating losses and, for the 1999 period, also reflected
increases in accounts receivable and in prepaid expenses and other assets offset
by increases in accounts payable and accrued liabilities.
On September 3, 1999, Registrant entered into an agreement with America
Online, Inc., under which AOL agreed, among other things, to deliver a
guaranteed number of impressions. In addition, Registrant developed separate
co-branded web sites on the following AOL properties: AOL.com, CompuServe
Service and Netscape Netcenter and Digital City. In exchange, Registrant paid
AOL $13 million and agreed to pay an additional $20 million over the next two
years. These amounts will be charged to earnings over the three-year life of the
contract. In addition, Registrant granted AOL two seven-year warrants, each to
purchase up to 1,352,158 shares of its common stock. One of the warrants fully
vested on signing and has an exercise price of $10 per share. The other warrant
will vest over a three-year period based on AOL meeting specified performance
requirements and will have exercise prices equal to the fair market value of
Registrant's common stock at the times the warrant becomes exercisable. At the
time of issuance, each warrant had a value of approximately $2,530,000 as
determined using the Black-Scholes option pricing model. The value of the fully
vested warrant is fixed and will be charged to earnings over the three-year AOL
contract period, whereas the warrant that vests over three years will be charged
to earnings adjusted variably over the vesting period.
On June 15, 1999, Registrant entered into a License and Web Site
Development Agreement with Softwatch Ltd., an Israeli company, and its U.S.
subsidiary, Softwatch, Inc., under which Registrant licenses software from
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Softwatch to support its consumer sites and to provide ongoing support services
for its consumer sites. At the same time, Registrant purchased 1,040,170 Series
A preferred shares of Softwatch Ltd. for $2,999,954. In 1998, the cash used in
investing activities was primarily for the purchase of Healthcare Communications
Group.
Net cash used in investing activities was $0.2 million, $1.5 million
and $47.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Cash used in investing activities in 1999 related primarily to the
investment of the proceeds of Registrant's initial public offering in short-term
investment securities combined with the reinvestment of matured short-term
investment securities in its portfolio. The other primary uses of funds include
its investment in Softwatch and investments in its technology infrastructure,
including the development of Registrant's consumer web site launched in
September 1999.
Cash provided by financing activities was $7.3 million, $3.6 million
and $83.0 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
Cash provided by financing activities in 1999 reflects net proceeds
received from the initial public offering of common stock, as well as the
issuance of Series D and Series E preferred stock and common stock. Cash
provided by financing activities in 1998 reflects net proceeds received from the
issuance of Series C preferred stock, and in 1997 from the issuance of Series C
preferred stock.
As of December 31, 1999, the primary source of liquidity for Registrant
was $40.8 million of cash and cash equivalents and marketable investment
securities. As of that date, it had no bank credit facilities.
Registrant expects to continue to incur significant operating costs,
particularly content creation costs and sales and marketing costs to grow its
business and pursue its branding and marketing campaign. A large portion of its
promotional expenses for its consumer sites will result from approximately $150
million in advertising to be received from CBS.
Registrant believes that its current cash, cash equivalents and
investment securities combined with any cash generated from operations will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, if during or following
that period Registrant is not successful in generating sufficient cash flow from
operations or in raising additional capital when required in sufficient amounts
and on terms acceptable to it, these failures could have a material adverse
effect on its business, results of operations and financial condition. If
Registrant raises additional funds through the issuance of equity securities,
the percentage ownership of its then current stockholders would be reduced.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
reliably distinguish dates beginning on January 1, 2000 from dates prior to the
year 2000. Many software and computer systems used by companies and governmental
agencies may need to be upgraded or replaced in order to correctly process dates
beginning in 2000 and comply with Year 2000 requirements.
In preparation for the year 2000, Registrant conducted a comprehensive
review of both information technology and non-information systems to ensure that
they were Year 2000 compliant. Significant information technology systems
include its production system, composed of the servers, networks and software
that comprise the underlying technical infrastructure that runs its business,
and various internal office systems. Its significant non-information technology
systems include the telephone systems, air conditioning and security system.
Because Registrant is a relatively new business, the majority of its own
hardware and software has been acquired or developed within the last two years,
during which time there was a high awareness of Year 2000 issues.
To date, Registrant has not experienced any material difficulties
associated with the year 2000 that would have a negative effect on its ability
to conduct business. To its knowledge, no third party upon which Registrant
depends has experienced a material Year 2000 problem. However, it is still
possible that errors or defects may remain undetected or that dates other than
January 1 may trigger Year 2000 problems. If this occurs with respect to
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Registrant's software systems, or those of third parties on which it relies, its
business, reputation, financial condition and results of operations may be
adversely impacted.
SUBSEQUENT EVENTS
On February 9, 2000, the Board of Directors approved the creation of
Medscape Europe to accelerate its international expansion in the face of rising
global demand for Web-based health information and services. In addition to its
European venture, Registrant already operates a Japanese-language site, Medscape
Japan.
On February 21, 2000, Registrant entered into an agreement to merge
with MedicaLogic Inc. Registrant shareholders will receive 0.323 shares of
MedicaLogic common stock for each share of Registrant's common stock. The
transaction will become effective upon approval by the shareholders of the two
companies and the satisfaction of other customary conditions. In connection with
the proposed transaction, Registrant issued warrants to purchase 100,000 shares
of its common stock at $9.3125 per share to its financial advisor. Simultaneous
with the announcement of the merger with MedicaLogic, MedicaLogic announced that
it had agreed to acquire Total eMed, Inc., a provider of electronic medical
transcription services, for approximately eight million shares of MedicaLogic's
common stock.
In February of 2000, Registrant signed a plan of merger and
reorganization to acquire all of the outstanding shares of Dialog Medical, Inc.,
a Delaware corporation, in exchange for 150,000 shares of Registrant's common
stock upon closing and an additional 125,000 shares subject to certain
performance criteria. Dialog Medical provides integrated patient education and
informed consent materials for physicians and consumers. Registrant expects to
complete the acquisition in the first quarter of 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of the Company's investment activities is to
preserve principal while at the same time maximizing the income received from
investments without significantly increasing risk. Accordingly, the Company does
not enter into financial instrument transactions for trading purposes. Some
investments may be subject to market risk, which means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. To minimize this risk, the Company invests its cash in money market
funds. In general, money market funds are not subject to market risk as the
interest paid on these funds fluctuates with the prevailing interest rate. As of
September 30, 1999, all of the Company's investments mature in less than one
year.
EXCHANGE RATE SENSITIVITY
In Management's opinion, the Company's exposure to foreign currency
exchange rate fluctuations is minimal as no revenue is currently denominated in
a foreign currency and minimal expenses are paid in a foreign currency.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
MEDSCAPE, INC.
Independent Auditors' Report...................................... 22
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998 (As Restated)................................. 23
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 (As Restated), and 1997................. 24
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended December 31,
1999, 1998 (As Restated), and 1997.............................. 25
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 (As Restated),
and 1997........................................................ 29
Notes to Consolidated Financial Statements........................ 30
HEALTHCARE COMMUNICATIONS GROUP, LLC
Independent Auditors' Report...................................... 42
Balance Sheets as of December 31, 1997 and
October 27, 1998................................................ 43
Statements of Operations for the Year Ended December 31,
1997 and the Ten Months Ended October 27, 1998.................. 44
Statements of Member's Capital for the Year Ended
December 31, 1997 and the Ten Months Ended October 27, 1998....... 45
Statements of Cash Flows for the Year Ended December 31,
1997 and the Ten Months Ended October 27, 1998.................. 46
Notes to Financial Statements..................................... 47
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
Medscape, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Medscape, Inc. and its subsidiary ("Medscape") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in stockholders'
(deficiency) equity, and cash flows for the years ended December 31, 1999, 1998
and 1997. These consolidated financial statements are the responsibility of
Medscape's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Medscape at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the years ended December 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
22
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................$ 4,456 $ 1,595
Investment securities, available for sale............. 36,363 --
Accounts receivable................................... 5,946 1,350
Prepaid marketing..................................... 12,000 --
Prepaid expenses and other assets..................... 3,256 93
----------- ------------
Total current assets.......................... 62,021 3,038
Fixed assets-- net...................................... 7,568 380
Intangible assets-- net................................. 12,590 2,456
Investment in Softwatch................................. 3,156 --
----------- ------------
Total assets..................................$ 85,335 $ 5,874
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities..............$ 9,567 $ 871
Deferred revenue...................................... 1,580 799
----------- ------------
Total current liabilities..................... 11,147 1,670
----------- ------------
Stockholders' Equity:
Common stock, par value $.01; 100,000,000
shares authorized, 44,680,144 issued and
44,661,094 outstanding at December 31, 1999........ 447 --
Common stock, Class A -- 0 shares authorized at
December 31, 1999; par value $.01; 15,000,000
shares authorized, 1,079,000 issued and 11
outstanding at December 31, 1998..................... --
Common stock, Class B -- 0 shares authorized at,
December 31 1999; par value $.01; 15,000,000
shares authorized, 5,792,318 issued and 58
outstanding at December 31, 1998..................... -- --
Preferred stock, Undesignated -- par value $.01;
5,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 1999; 0 shares -- --
authorized at December 31, 1998......................
Preferred stock, Series A -- 0 shares authorized at
December 31, 1999; par value $.01; 1,000,000 shares
authorized, 788,200 issued and outstanding at
December 31, 1998................................... -- 8
Preferred stock, Series C -- 0 shares authorized at
December 31, 1999; par value $.01; 4,000,000 shares
authorized, 2,410,760 issued and outstanding at
December 31, 1998 -- 24
Additional paid-in capital............................ 266,196 14,158
Warrants.............................................. 6,840 --
Deferred stock compensation........................... (7,984) (715)
Contribution of services.............................. (145,224) --
Treasury stock........................................ (3) (3)
Notes receivable...................................... (628) (628)
Accumulated other comprehensive loss (36) --
Accumulated deficit................................ (45,420) (8,709)
----------- ------------
Total stockholders' equity.................... 74,188 4,204
----------- ------------
Total liabilities and stockholders' equity $ 85,335 $ 5,874
=========== ============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
<S> <C> <C> <C>
Revenue.......................................... $ 11,156 $ 3,069 $ 1,522
----------- ----------- -----------
Operating expenses:
Editorial, production, content and technology
(excludes stock-based compensation expense of
$166 in 1999 and $26 in 1998 included below) 12,967 2,694 1,967
Sales and marketing (excludes stock-based
compensation expense of $83 in 1999 included 26,944 2,520 1,397
below)........................................
General and administrative (excludes
stock-based compensation expense of $1,852
in 1999 and $223 in 1998 included below)...... 6,048 1,469 1,450
Depreciation and amortization................. 1,010 287 160
Stock-based compensation...................... 2,101 249 --
------------ ----------- -----------
Total operating expenses............... 49,070 7,219 4,974
----------- ----------- -----------
Loss from operations............................. (37,914) (4,150) (3,452)
Interest expense (income)..................... (1,203) (249) 12
Net loss......................................... $ (36,711) $ (3,901) $ (3,464)
=========== =========== ===========
Basic net loss per share......................... $ (1.89) $ (1.07) $ (1.26)
=========== =========== ===========
Weighted average number of shares of common
stock Outstanding............................ 19,400,443 3,636,558 2,750,552
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CLASS A CLASS B UNDESIGNATED
------- ------- ------------
COMMON STOCK COMMON STOCK COMMON STOCK PREFERRED STOCK
------------------- ------------------- ---------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,079,000 $10,790 1,627,000 $16,270 -- -- -- --
Issuance of Series B
preferred stock -- -- -- -- -- -- -- --
Conversion of preferred stock -- -- -- -- -- -- -- --
Issuance of series C preferred
stock -- -- -- -- -- -- -- --
Exercise of stock options -- -- 99,645 995 -- -- --
Contributed capital -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------- ------- -------
Balance, December 31, 1997 1,079,000 10,790 1,726,645 17,265 -- -- -- --
Purchase of treasury stock -- -- -- -- -- -- -- --
Options issued to nonemployees -- -- -- -- -- -- -- --
Deferred stock compensation
related to issuance of -- -- -- -- -- -- -- --
options
Issuance of series C preferred
stock -- -- -- -- -- -- -- --
Issuance of class B common
stock (acquisition)
-- -- 3,650,870 36,510 -- -- -- --
Exercise of stock options
-- -- 414,803 4,148 -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------- ------- -------
Balance, December 31, 1998 1,079,000 $10,790 5,792,318 $57,923 -- $ -- -- $ --
========= ======= ========= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------- -------- --------
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ..... 788,200 $7,882 -- -- -- --
Issuance of Series B
preferred stock ............ -- -- 123,974 1,240 -- --
Conversion of preferred stock -- -- (123,974) (1,240) 326,087 3,261
Issuance of series C preferred
stock ...................... -- -- -- -- 1,152,272 11,523
Exercise of stock options .... -- -- -- -- -- --
Contributed capital .......... -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
------- ------ -------- ------- --------- -------
Balance, December 31, 1997 ..... 788,200 7,882 -- -- 1,478,359 14,784
Purchase of treasury stock ... -- -- -- -- -- --
Options issued to nonemployees -- -- -- -- -- --
Deferred stock compensation
related to issuance of ..... -- -- -- -- -- --
options
Issuance of series C preferred
stock ...................... -- -- -- -- 932,401 9,324
Issuance of class B common
stock (acquisition)
------- ------ -------- ------- --------- -------
Exercise of stock options
------- ------ -------- ------- --------- -------
Amortization of deferred stock
compensation ............... -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
------- ------ -------- ------- --------- -------
Balance, December 31, 1998 .. 788,200 $7,882 -- $ -- 2,410,760 $24,108
======= ====== ======== ======= ========= =======
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SERIES D DEFERRED
PREFERRED STOCK ADDITIONAL CONTRIBU- STOCK
PAID-IN TION OF COMPENSA- NOTES
SHARES AMOUNT CAPITAL WARRANTS SERVICES TION RECEIVABLE
------ ------ ------- -------- -------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- -- $15,301 -- -- -- --
Issuance of series B
preferred stock....... -- -- 1,498,760 -- -- -- --
Conversion of -- -- (2,021) -- -- -- --
preferred stock
Issuance of series C
preferred stock....... -- -- 5,288,924 -- -- -- --
Exercise of stock -- -- 3,078 -- -- -- --
options.................
Contributed capital.... -- -- 642,364 -- -- -- --
Net loss...............
------- ------- ----------- ------- -------- ---------- -------
-- -- -- -- -- -- --
Balance, December 31, 1997 -- -- 7,446,406 -- -- -- --
Purchase of treasury -- -- -- -- -- -- --
stock
Options issued to
nonemployees -- -- 65,000 -- -- -- --
Deferred stock
compensation related -- -- 497,445 -- -- (497,445) --
to issuance of options
Issuance of series C
preferred stock....... -- -- 3,990,675 -- -- -- --
Issuance of class B
common stock -- -- 2,154,013 -- -- (467,311) (627,950)
(acquisition)
Exercise of stock -- -- 4,770 -- -- -- --
options.................
Amortization of
deferred stock -- -- -- -- -- 249,320 --
compensation
Net loss............... -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
Balance, December 31, 1998 -- $ -- $14,158,309 $ -- -- $ (715,436) $(627,950)
== == == =========== == == == == ========== =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHEN- TREASURY
DEFICIT SIVE LOSS STOCK TOTAL
------- --------- ----- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $(1,344,490) -- -- $(1,294,247)
Issuance of series B
preferred stock....... -- -- -- 1,500,000
Conversion of -- -- -- --
preferred stock
Issuance of series C
preferred stock....... -- -- -- 5,300,447
Exercise of stock -- -- -- 4,073
options.................
Contributed capital.... -- -- -- 642,364
Net loss............... (3,463,914) (3,463,914)
----------- --------- -------- -----------
Balance, December 31, 1997 (4,808,404) -- -- 2,688,723
Purchase of treasury -- -- (3,277) (3,277)
stock
Options issued to
nonemployees -- -- -- 65,000
Deferred stock
compensation related -- -- -- --
to issuance of options
Issuance of series C
preferred stock....... -- -- -- 3,999,999
Issuance of class B
common stock -- -- -- 1,095,262
(acquisition)
Exercise of stock -- -- -- 8,918
options.................
Amortization of
deferred stock -- -- -- 249,320
compensation
Net loss............... (3,900,619) -- -- (3,900,619)
----------- -- -- ----------
Balance, December 31, 1998 $(8,709,023) $-- (3,277) $4,203,326
=========== === ====== ==========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
CLASS A CLASS B UNDESIGNATED
------- ------- ------------
COMMON STOCK COMMON STOCK COMMON STOCK PREFERRED STOCK
------------ ------------ ------------ ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,079,000 $10,790 5,792,318 $57,923 -- -- -- --
Issuance of series D
preferred stock -- -- -- -- -- -- -- --
Warrants issued as -- -- -- -- -- -- -- --
compensation
Issuance of class A & B
common stock to CBS Corp. 7,397,208 73,972 6,541,160 65,412 -- -- -- --
Issuance of class A common
stock and series E
preferred stock to NDC Corp. 1,000,000 10,000 -- -- -- -- -- --
Warrants issued as
compensation for services -- -- -- -- -- -- -- --
Exercise of stock options -- -- 1,311,773 13,118 -- -- -- --
Initial public offering of
common stock -- -- -- -- 7,650,000 76,500 -- --
Conversion to common stock at
initial public offering (9,476,208) (94,762) (13,645,251) (136,453) 37,030,144 370,302 -- --
Deferred stock compensation
related to issuance of -- -- -- -- -- -- -- --
options
Advertising and promotion
services received for stock -- -- -- -- -- -- -- --
Revaluation of warrants
issued as compensation for -- -- -- -- -- -- -- --
services
Amortization of deferred
stock compensation -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
Net unrealized loss on
investments -- -- -- -- -- -- -- --
Balance, December 31, 1999 -- $ -- $ -- 44,680,144 $ 446,802 -- $ --
== == == == == ========== ========= == ====
</TABLE>
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------- -------- --------
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 788,200 $7,882 -- -- 2,410,760 $24,108
Issuance of series D
preferred stock -- -- -- -- -- --
Warrants issued as -- -- -- -- -- --
compensation
Issuance of class A & B
common stock to CBS Corp. -- -- -- -- -- --
Issuance of class A common
stock and series E
preferred stock to NDC Corp. -- -- -- -- -- --
Warrants issued as
compensation for services -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Initial public offering of
common stock -- -- -- -- -- --
Conversion to common stock at
initial public offering (788,200) (7,882) -- -- (2,410,760) (24,108)
Deferred stock compensation
related to issuance of -- -- -- -- -- --
options
Advertising and promotion
services received for stock -- -- -- -- -- --
Revaluation of warrants
issued as compensation for -- -- -- -- -- --
services
Amortization of deferred
stock compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
Net unrealized loss on
investments -- -- -- -- -- --
Balance, December 31, 1999 -- $-- -- $-- -- $--
== === == === == ===
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
SERIES D & E DEFERRED
PREFERRED STOCK ADDITIONAL CONTRIBU- STOCK
PAID-IN TION OF COMPENS NOTES
SHARES AMOUNT CAPITAL WARRANTS SERVICES -ATION RECEIVABLE
------ ------ ------- -------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 -- -- $14,158,309 -- -- $(715,436) $(627,950)
Issuance of series D
preferred stock 1,757,683 17,577 19,396,969 -- -- -- --
Warrants issued as
compensation -- -- (85,003) 85,003 -- -- --
Issuance of class A & B
common stock to CBS Corp. -- -- 156,317,070 -- (149,860,616) -- --
Issuance of class A common
stock and series E
preferred stock to NDC Corp. 400,000 4,000 19,422,040 -- (3,500,000) -- --
Warrants issued as
compensation for services -- -- -- 5,060,000 -- (5,060,000) --
Exercise of stock options -- -- 252,324 -- -- -- --
Initial public offering of
common stock -- -- 54,206,383 -- -- -- --
Conversion to common stock at
initial public offering (2,157,683) (21,577) (85,520) -- -- -- --
Deferred stock compensation
related to issuance of
options -- -- 2,614,225 -- -- (2,614,225) --
Advertising and promotion
services received for stock -- -- -- -- 8,136,697 -- --
Revaluation of warrants
issued as compensation for
services -- -- -- 1,695,000 -- (1,695,000) --
Amortization of deferred
stock compensation -- -- -- -- -- 2,101,246 --
Net loss -- -- -- -- -- -- --
Net unrealized loss on -- -- -- -- -- -- --
investments
Balance, December 31, 1999 -- $ -- $266,196,797 $6,840,003 $(145,223,919) $(7,983,415) $(627,950)
== == == ============ ========== ============= ============ =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE TREASURY
DEFICIT LOSS STOCK TOTAL
------- ---- ----- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $(8,709,023) -- $(3,277) $4,203,326
Issuance of series D
preferred stock -- -- -- 19,414,546
Warrants issued as
compensation -- -- -- --
Issuance of class A & B
common stock to CBS Corp. -- -- -- 6,595,838
Issuance of class A common
stock and series E
preferred stock to NDC Corp. -- -- -- 15,936,040
Warrants issued as
compensation for services -- -- -- --
Exercise of stock options -- -- -- 265,442
Initial public offering of
common stock -- -- -- 54,282,883
Conversion to common stock at
initial public offering -- -- -- --
Deferred stock compensation
related to issuance of
options -- -- -- --
Advertising and promotion
services received for stock -- -- -- 8,136,697
Revaluation of warrants
issued as compensation for
services -- -- -- --
Amortization of deferred
stock compensation -- -- -- 2,101,246
Net loss (36,711,716) -- -- (36,711,716)
Net unrealized loss on -- (36,201) -- (36,201)
investments
Balance, December 31, 1999 $(45,420,739 (36,201) $(3,277) $74,188,101
============ ======== ======== ===========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (36,711) $ (3,901) $ (3,464)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation expense............. 2,101 249 --
Amortization of license fees................. 794 -- --
Non-cash advertising and promotion........... 8,366 -- --
Depreciation and amortization................ 1,010 287 160
Recruiting fees-- issuance of options........ -- 65 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (4,596) 474 (284)
Increase in prepaid marketing, expenses and
other assets ................................ (12,891) (6) (21)
Increase (decrease) in accounts payable and
accrued liabilities.......................... 8,696 (265) (91)
Increase (decrease) in deferred revenue...... 781 (1,126) 92
----------- ----------- -----------
Net cash used in operating activities (32,450) (4,223) (3,608)
----------- ---------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets........................ (8,034) (262) (222)
Acquisition of intangible assets................ (93) -- --
Investment in Softwatch......................... (3,156) -- --
Purchase of investment securities............... (136,561) -- --
Proceeds from maturities and sales of investment
Securities................................... 100,162
Payments for business acquired, net of cash
Acquired (note 1)............................ -- (1,195) --
----------- ----------- -----------
Net cash used in investing activities (47,682) (1,457) (222)
----------- ---------- -----------
FINANCING ACTIVITIES
Proceeds from loan.............................. -- -- 962
Payment of loan................................. -- (359) (1,150)
Proceeds from issuance of common stock.......... 53,858 -- --
Proceeds from issuance of preferred stock....... 28,870 4,000 6,801
Proceeds from exercise of stock options......... 265 9 4
Purchase of treasury stock...................... -- (3) --
Contributed capital............................. -- -- 642
----------- ---------- -----------
Cash provided by financing activities 82,993 3,647 7,259
----------- ---------- -----------
Increase (decrease) in cash and cash equivalents.. 2,861 (2,033) 3,429
Cash and cash equivalents, beginning of period.... 1,595 3,628 199
----------- ---------- -----------
Cash and cash equivalents, end of period.......... $ 4,456 $ 1,595 $ 3,628
=========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Medscape, Inc. was formed and incorporated under the laws of the State
of New York in March 1996, and commenced operations in April 1996. The Company
was reincorporated in Delaware in December 1998. The Company operates
Medscape.com, a healthcare web site for physicians and allied healthcare
professionals such as pharmacists and nurses, and CBS.Healthwatch.com, a
separate web site to enhance and personalize the consumer experience. The
Company's web sites are a valuable resource that enables members to make
better-informed healthcare decisions. The Company provides comprehensive,
authoritative and timely medical information, including original proprietary
articles written by renowned medical experts. The Company sells advertising and
sponsorship, market research and other services to pharmaceutical, medical
device and other healthcare companies. The Company also sells products, such as
medical books, to physicians, allied healthcare professionals and consumers. The
Company operates in one segment in the United States.
Effective October 27, 1998, the Company consummated an acquisition in
accordance with a purchase agreement with Healthcare Communications Group, LLC,
("HCG") a Maryland corporation. HCG is a medical communications/education
company that develops, produces and distributes unique live, print, digital and
Internet-based programs for healthcare professionals funded by pharmaceutical
companies. The agreement provided for the purchase of the membership interests
of HCG.
The purchase price of $2,304,671 was allocated principally to working
capital and assets, including accounts receivable and goodwill (see below).
The acquisition of HCG has been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their respective estimated fair
values at the date of acquisition. The excess of the purchase price over the
aggregated estimated fair values of the net tangible assets acquired has been
recorded as goodwill, which is being amortized over fifteen years.
The purchase price was allocated in the following manner:
Purchase price:
Cash at closing........................ $ 1,075,000
Legal and accounting fees.............. 134,409
Common stock 1,825,435 shares at $0.60
(Note8) ............................... 1,095,262
-----------
2,304,671
Liabilities assumed:
Accounts payable....................... $ 74,777
Demand note, Medscape.................. 275,000
Deferred revenue....................... 1,121,193
Payroll tax liabilities................ 5,182 1,476,152
---------- -----------
Assets purchased:
Cash................................... 14,081
Accounts receivable.................... 1,190,359
Prepaid expenses....................... 54,730
Fixed assets........................... 76,777
Intangibles............................ 5,383 (1,341,330)
---------- -----------
Total goodwill........................... $ 2,439,493
===========
The following presents, on a pro forma basis, the Company's operations
as if Medscape and HCG were combined as of the beginning of the periods
presented.
JANUARY 1, JANUARY 1,
1998 1997
(UNAUDITED)
Total revenue $ 5,653,660 $ 4,677,687
=========== ===========
Net loss..... $(3,928,202) $(3,086,341)
=========== ===========
30
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiary, HCG. The results of the subsidiary acquired are
included from the date of acquisition. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term cash investments
purchased with maturities of three months or less as cash and cash equivalents.
INVESTMENT SECURITIES
The Company maintains a portfolio of short-term investment securities.
All such investments are classified as available for sale, which requires that
each security be carried at fair value with changes in fair value reflected as a
component of comprehensive income within stockholders' equity.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration
of credit risks consist primarily of cash and cash equivalents, investment
securities, and trade accounts receivable. The Company maintains its cash and
cash equivalents in bank accounts which, at times, exceed federally insured
limits. The Company maintains its investment securities with an internationally
known financial institution. The Company has not experienced any losses in these
accounts. The Company believes it is not exposed to any significant credit risk
on cash and cash equivalents or its investment securities. Concentrations of
credit risks with respect to accounts receivable are limited because of the
Company's expanding customer base and the credit worthiness of its three major
customers (see Note 12), making up the majority of the accounts receivable
balance.
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation of property and equipment based
on the estimated useful lives of the applicable assets and the life of leases or
the life of the leasehold improvement if less, using the straight-line method.
Expenditures for renewals and improvements which extend the useful
lives of assets are capitalized, while maintenance and repairs are charged to
operations as incurred.
SOFTWARE DEVELOPED FOR INTERNAL USE
The Company accounts for the costs of developing software for internal use under
the provisions of American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE which was effective for the year
ended December 31, 1999. This SOP provides for the capitalization of both
internal costs, such as payroll and payroll related costs, and
31
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
external costs that are directly related to the development of certain systems
and related software. Medscape amortizes these costs over the anticipated life
of the systems. Prior to January 1, 1999, the Company expensed all internal
costs related to software development.
GOODWILL, OTHER INTANGIBLE ASSETS AND RELATED AMORTIZATION
Goodwill represents the excess of cost over the fair value of the net
assets acquired of HCG and is being amortized using the straight-line method
over fifteen years.
Other intangible assets consist of licenses and trademarks which are
being amortized using the straight-line method over their estimated useful life.
On June 15, 1999, the Company purchased 1,040,170 Series A Preferred
Shares of Softwatch Ltd. (Softwatch), an Israeli company, for $2,999,954. At the
same time, the Company and Softwatch entered into a License and Web Site
Development Agreement pursuant to which the Company licensed software from
Softwatch to support its consumer site and for Softwatch to provide ongoing
support services for the consumer site. On the date of the Agreement, the
Company paid $500,000 in cash of a total $1,500,000 licensing fee. $500,000 of
the remaining balance will be paid upon delivery of the software and $500,000
upon acceptance by the Company. The Company will also pay royalties under the
Agreement. The Company accounts for its investment of Softwatch on the cost
method.
IMPAIRMENT OF LONG LIVED ASSETS
The Company's long-lived assets and identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the net carrying amount may not be recoverable. When these events occur,
the Company measures impairment by comparing the carrying value of the
long-lived asset to the estimated undiscounted future cash flows expected to
result from use of the assets and their eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
assets, the Company would recognize an impairment loss. The Company determined
that, as of December 31, 1999 and 1998, there had been no impairment in the
carrying value of the long-lived assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The value of cash and cash equivalents, accounts receivable and
accounts payable approximates their carrying value due to their short-term
maturities. The investment securities are carried at their fair market value.
REVENUE RECOGNITION
Income is derived from a variety of sources including advertising,
sponsorship of on-line journals, medical conferences, market research and
e-commerce. Revenues from advertising are recognized in the period in which the
advertisement is displayed. Revenue from sponsored programs, such as medical
conferences, are recognized when the conference is completed and the next-day
conference summary is published on the Company's Web site. Revenues from
sponsored content, such as clinical modules, is recognized on a percentage of
completion basis. Revenues from market research are recognized upon completion
of the project.
DEFERRED REVENUE
Deferred revenue represents amounts billed in excess of revenues
recognized. Included in accounts receivable are amounts due (under contract)
relating to deferred revenue.
32
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.
SFAS No. 109 establishes financial accounting and reporting standards for the
effect of income taxes that result from activities during the current and
preceding years. SFAS No. 109 requires an asset and liability approach for
financial reporting for income taxes.
NET LOSS PER COMMON SHARE
Basic loss per common share was computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Diluted loss per
common share has not been presented since the impact for options, warrants and
conversion of preferred shares would have been anti-dilutive (see notes 8 and
9).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and hedging activities, and, as amended, is
required to be adopted during the Company's year ending December 31, 2001.
Generally, SFAS No. 133 requires that an entity recognize all derivatives as
either an asset or liability and measure those instruments at fair value, as
well as identify the conditions for which a derivative may be specifically
designated as a hedge. The Company currently does not have any derivative
instruments and is not engaged in hedging activities.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the
current year presentation.
3. INVESTMENT SECURITIES
At December 31, 1999, investment securities available for sale consist
of the following (in thousands):
<TABLE>
<CAPTION>
GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
CATEGORY COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Commercial paper........... $ 7,667 $ 1 -- $ 7,668
Corporate debt securities.. 12,176 -- (10) 12,166
Asset backed securities.... 16,556 -- (27) 16,529
---------- ---------- ---------- --------
$ 36,399 $ 1 $ (37) $ 36,363
========== ========== ========== ========
</TABLE>
All of the commercial paper and corporate debt securities have
contractual maturity dates of less than one year. All of the asset-backed
securities have effective maturity dates of less than one year and have
contractual maturity dates ranging from less than one year to greater than ten
years. A summary of the contractual maturities is as follows (in thousands):
GROSS FAIR
AMORTIZED MARKET
MATURITY CATEGORY COST VALUE
Due within 1 year.......... $ 19,843 $ 19,834
Due after 1 year though 5
years...................... 14,174 14,150
Asset backed securities.... 2,382 2,379
---------- ---------
$ 36,399 $ 36,363
========== =========
33
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FIXED ASSETS
Fixed Assets consist of the following (in thousands):
DECEMBER 31,
---------------------- USEFUL LIFE
DESCRIPTION 1999 1998 (IN YEARS)
Computers and peripherals.. $ 4,122 $ 602 3
Software................... 3,716 -- 3
Furniture and fixtures..... 205 66 5
Leasehold improvements..... 798 139 2
---------- ----------
8,841 807
Less accumulated depreciation (1,273) (427)
---------- ----------
Fixed assets-- net......... $ 7,568 $ 380
========== ==========
5. INTANGIBLE ASSETS
Intangible Assets consist of the following (in thousands):
DECEMBER 31,
-------------------- USEFUL LIFE
DESCRIPTION 1999 1998 (IN YEARS)
Trademarks................. $ 147 $ 55 15
Licenses................... 11,000 -- *
Goodwill................... 2,439 2,439 15
Organization costs......... -- 23 5
--------- --------
13,586 2,517
Less accumulated amortization (996) (61)
---------- --------
Intangible assets-- net.... $ 12,590 2,456
========== ========
In 1997, the Company changed the useful life of intangible assets from
40 years for trademarks and 15 years for organization costs to 15 and 5 years,
respectively, to more properly reflect their expected useful lives in the
current business environment. The impact of the change was not material to the
Company's financial statements.
* This category is comprised of 2 licenses, the first license
is valued at $7,000,000 and is being amortized over 7 years and the second
license is valued at $4,000,000 and is being amortized over it's useful life of
3 years.
6. INCOME TAXES
No provision for income taxes has been made because the Company has
sustained cumulative losses since the commencement of its operations.
At December 31, 1999, the Company had net operating loss carryforwards
("NOLs") of approximately $51.7 million. Utilization of a certain portion of
these losses against future income may be subject to limitations. The NOLs are
scheduled to expire in the following years:
2011... $ 663,000
2012... 3,306,000
2018... 3,583,000
2019... 43,168,000
34
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS No. 109, the Company has computed the
components of deferred income taxes as follows (in thousands):
DECEMBER 31,
------------
1999 1998 1997
Deferred tax assets... $ 23,756 $ 3,420 $ 1,961
Less valuation allowance (23,756) (3,420) (1,961)
----------- ----------- -----------
Net deferred tax assets $ -- $ -- $ --
=========== =========== ===========
The principal component of the Company's deferred tax asset is its
NOLs. At December 31, 1999 and 1998, a valuation allowance equal to the amount
of the deferred tax assets is provided as it has not been established that it is
more likely than not that the tax benefits will be realized.
7. RETIREMENT PLAN
The Company has a 401(k) Retirement/Savings Plan (the "Plan") for all
eligible employees. Employees are eligible to participate after they have
completed three months of service. The Company is not required to, but may match
employee contributions. In addition, the Company may make a discretionary
contribution to the Plan. The Company did not make any contributions to the Plan
for the years ended December 31, 1999, 1998 or 1997.
8. STOCKHOLDERS' (DEFICIENCY) EQUITY
The only authorized stock of the Company at December 31, 1999 is the
common stock and the Undesignated Preferred Stock. All other issues were either
redesignated or converted to common stock with the Company's initial public
offering on September 27, 1999.
In January 1997, the Company issued 123,974 shares of Series B
preferred stock at $12.10 per share for $1,500,000. In October 1997, the Company
issued 1,152,272 shares of Series C preferred stock at $4.60 per share for
$5,300,447. As part of this offering, the Company converted all of the Series B
preferred stock outstanding for 326,087 shares of Series C Preferred stock at
$4.60 per share. The total capital raised in 1997 from these offerings was
$6,800,447, of which $800,000 was used to pay the principal and interest on the
loan payable to SCP Communications, Inc. ("SCP"), a related party, with the
remainder used to fund the Company's ongoing operations.
During 1997, SCP contributed to capital $642,364 which the Company owed
to it under an administrative services agreement (note 13).
In March 1998, the Company issued 932,401 shares of Series C preferred
stock at $4.29 per share for $3,999,999. In October 1998, the Company issued
1,825,435 shares of Class B common stock in connection with the acquisition of
Healthcare Communications Group. The Company also received a note for $627,950
from the majority shareholder in lieu of payment for an additional 1,825,435
shares of Class B common stock. The note is presented as a contra to
shareholders' equity. Such shares vest over 3 years. The fair value in excess of
$627,950 has been included in the charge to deferred stock compensation as an
offset in the equity section of the balance sheet and is being amortized over
three years.
On May 17, 1999, the Company effected a 2.5-for-one stock split for
each outstanding share of each class of common shares. In connection with the
stock split, the number of authorized shares of Class A common stock was
increased to an aggregate of 1,079,000 shares, the number of authorized shares
of Class B common stock was increased to an aggregate of 6,701,363 shares and
the preferred stock became convertible into 2.5 times as many shares of the
Class A common stock and each outstanding warrant and option became exercisable
into 2.5 times as many shares of the Class B common stock. The 2.5-for-one stock
split described above has been applied retrospectively for all periods
presented.
35
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 27, 1999, the Company completed an initial public offering
that ultimately, after inclusion of the exercise on September 30, 1999 of the
900,000 share underwriter's over-allotment, resulted in the issuance of
7,650,000 shares of common stock. Net proceeds received, after deducting
offering costs, totaled approximately $54.4 million, including approximately
$6.7 million received on October 5, 1999 from the exercise of the
over-allotment. Simultaneous with the offering, each outstanding share of Class
B common stock was converted into Class A common stock on a one-for-one basis
and Class A common stock was concurrently redesignated as common stock.
Additionally, each outstanding share of Series A, Series C-1, and Series D
preferred stock was converted into 2.5 shares of common stock, Series C
preferred stock was converted into 2.68 shares of common stock, and Series E
preferred stock was converted into 3.125 shares of common stock. The conversions
of preferred stock resulted in the issuance of 13,908,685 shares of common
stock. An increase in the number of authorized shares of common stock to
100,000,000 was also effected simultaneous with this offering and a new class of
5,000,000 shares of undesignated preferred stock was also authorized.
During September 1999, stock was issued to CBS corporation (CBS) and
National Data Corporation (NDC) as discussed in Note 10.
9. STOCK OPTION PLAN
During 1996, the Board of Directors adopted the Medscape, Inc. 1996
Stock Option Plan (the "Plan"). Pursuant to the Plan, the Board of Directors
granted incentive stock options to certain key employees and non-qualified stock
options to certain key non-employees all at fair value. Under the Plan approved
by the Board of Directors, the total number of shares of common stock that may
be granted is 8,250,000.
The incentive stock options granted permit key employees the right and
option to purchase shares of common stock. Except for a change of control, as
defined, an option may not be exercised within one year from the date of the
grant and no option will be exercisable after 10 years from the date granted.
Stock options vest over a three or four-year period, with one-third or
one-quarter of the options becoming exercisable one year from date of grant. For
options issued with an exercise below fair market value, the excess of the fair
market value over the exercise price has been charged to stock based
compensation expense and is being amortized over four years, the vesting period
of the options.
The non-qualified stock options also permit certain employees and
non-employees the right and option to purchase shares of common stock. Except
for a change of control, as defined, an option may not be exercised within one
year from the date of the grant and no option will be exercisable after 10 years
from the date granted. Stock options vest over a four-year period, with
one-quarter of the options becoming exercisable one year from date of grant. For
options issued with an exercise price below fair market value, the excess of the
fair market value over the exercise price has been charged to stock based
compensation expense and is being amortized over four years, the vesting period
of the options.
In addition, the non-qualified stock options granted permit other
non-employees the option to purchase shares of common stock. One-quarter of the
options are exercisable one year from date of grant. For options issued with an
exercise price below fair market value, the excess of the fair market value over
the exercise price has been charged to stock based compensation expense and is
being amortized over four years, the vesting period of the options.
36
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions involving the incentive stock options granted to key
employees are summarized as follows:
EXERCISE
OPTION PRICE
SHARES PER SHARE
Options outstanding January 1, 1997 284,677 $ --
Granted............................ 557,500 .144 & .172
Exercised.......................... (7,978) .011
Canceled........................... (109,977) --
--------- -------------
Options outstanding December 31, 1997 724,222 .011 - .172
Granted............................ 1,650,118 .172 & .344
Exercised.......................... (7,797) .011 & .144
Canceled........................... (48,125) .144 & .0172
--------- -------------
Options outstanding December 31, 1998 2,318,418 .011-.344
Granted............................ 3,316,038 8.625 - 10.00
Exercised.......................... (946,049) 011 - 3.40
Canceled........................... (177,600) .144 - 10.00
--------- -------------
Options outstanding December 31, 1999 4,510,807 .011-.10.00
========== =============
Employee options exercisable at December 31, 1999, 1998 and 1997 were
1,343,091, 344,873 and 63,325 respectively.
SFAS No. 123 provides for a fair value based method of accounting for
employee options and options granted to non-employees and measures compensation
expense using an option valuation model that takes into account, as of the grant
date, the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the
stock, and the risk-free interest rate for the expected term of the options. For
the years ended December 31, 1996 and 1997 the fair value of options granted to
non-employees were nominal as determined using the Black-Scholes option pricing
model.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
interpretations in accounting for its employee stock options. The Company has
issued its options at fair value at the date of grant. Under APB 25, because the
exercise price of the Company's employee stock options equals the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma disclosures as if the Company adopted the cost recognition
requirement under SFAS 123 is presented below.
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
Net loss as reported $ 36,712 $ 3,901 $ 3,464
Net loss pro forma 46,126 3,976 3,482
The fair value of options granted under the Plan for the years ended
December 31, 1999, 1998 and 1997 in complying with SFAS No. 123 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used: no dividend yield, no expected
volatility in 1997 and 1998, 75.657% was used in 1999, risk free interest rate
of 5.66% as of December 31, 1997, 4.60% as of December 31, 1998 and 6.00% as of
December 31, 1999, and expected lives of 3.25 years.
37
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions involving non-qualified stock options granted to
non-employees are summarized as follows:
EXERCISE
OPTION PRICE
SHARES PER SHARE
Options outstanding January 1, 1997 1,952,418 .011
Granted............................ 175,000 .144
Exercised.......................... (91,668) .011
Canceled........................... (6,018) .011
--------- -------------
Options outstanding December 31, 1997 2,029,732 .011 & .144
Granted............................ 340,000 .172 & .344
Exercised.......................... (407,005) .011 & .144
Canceled........................... (89,678) .011 & .172
--------- -------------
Options outstanding December 31, 1998 1,873,049 $ .011 - .344
Granted............................ - -
Exercised.......................... (365,725) .011 & .172
Canceled........................... (16,050) .011
--------- -------------
Options outstanding December 31, 1999 1,491,274 $ .011 - .344
========= =============
Non-employee options exercisable at December 31, 1999, 1998 and 1997
were 873,693, 998,330 and 625,742.5 respectively.
For options granted to non-employees in 1998, an amount equal to the
fair value of the services provided aggregating $65,000 is included as a charge
to general and administrative expenses in the 1998 statement of operations.
WARRANTS: TRANSACTION WITH AMERICA ONLINE, INC.
On September 3, 1999, the Company entered into an agreement with
America Online, Inc., under which AOL has agreed to promote the Company's
co-branded Web sites, through contextual links and banners, on the following AOL
properties: AOL, AOL.com, CompuServe Service, Netscape Netcenter and Digital
City. In addition, the Company has paid AOL $13 million and will pay an
additional $20 million over the next two years. These amounts will be charged to
earnings over the three-year life of the contract. In addition, the Company
granted AOL two seven-year warrants, each to purchase up to 1,352,158 shares of
the Company's common stock. One of the warrants fully vested on signing and has
an exercise price of $10 per share. The other warrant will vest over a
three-year period based on AOL meeting specified performance requirements and
will have exercise prices equal to the fair market value of the Company's common
stock at the time of vesting. At the time of issuance, each warrant had a value
of approximately $2,530,000, as determined using the Black-Scholes option
pricing model. The value of the performance warrant was approximately $4,225,000
as of December 31, 1999 as determined using the Black-Scholes option pricing
model. The value of the fully vested warrant is fixed and will be charged to
earnings over the three-year AOL contract, whereas the warrant that vests over
three years will be charged to earnings adjusted variably over the vesting
period.
WARRANTS: CREDIT SUISSE FIRST BOSTON - RELATED TO PRIVATE FINANCING
In March 1999, in connection with the placement of the Series D
preferred stock, the Company issued 14,887.5 warrants of Class B common stock to
its financial advisor. Each warrant entitles the warrant holder to purchase one
share of common stock for $0.004. The value of the warrants, determined using
the Black-Scholes pricing model, was $85,000.
10. SIGNIFICANT TRANSACTIONS
TRANSACTIONS WITH CBS CORPORATION
On July 7, 1999, the Company entered into a common stock Purchase
agreement, and on August 3, 1999, in
38
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related transactions, it entered into an Advertising and Promotional Agreement,
and a Trademark and Content Agreement with CBS Corporation (CBS). Under the
Stock Purchase Agreement, the Company sold 7,397,208 shares of Class A common
stock and 6,541,160 shares of Class B common stock to CBS for an aggregate
purchase price of $157,000,000, of which $139,384 was paid in cash, $149,860,616
is to be paid through the advertising services to be provided by CBS in
accordance with the Advertising and Promotion Agreement, and $7,000,000 is to be
paid through the grant of rights under the Trademark and Content Agreement.
Subsequent to the execution of the agreement, the Class B common stock was
converted on a one-for-one basis into Class A common stock that was concurrently
redesignated as common stock upon completion of the Company's initial public
offering (Note 8). Over the seven-year term of the Advertising and Promotion
Agreement, CBS will arrange for the placement of approximately $150 million of
advertising and promotion in the United States for the Company's consumer and
professional Web sites and their other products and services. Under the
Trademark and Content Agreement, CBS granted the Company a license to the "CBS"
trademark and "Eye" design and to health related news content for a seven-year
period. Under the agreement CBS retains significant control over the use and
presentation of the CBS health content and CBS trademarks.
The $149,860,616 of advertising services to be provided by CBS will be
expensed as used over the life of the agreement. In addition, the trademark
license fee of $7,000,000 will be amortized on a straight-line basis over the
life of the agreement.
TRANSACTIONS WITH NATIONAL DATA CORPORATION
On August 4, 1999, the Company sold 400,000 shares of Series E
preferred stock at a purchase price of $25 per share and 1,000,000 shares of
Class A common stock at a purchase price of $10 per share to National Data
Corporation (NDC), which included a $10,000,000 cash investment and an
additional $10,000,000 attributed to licensing and promotion to be provided by
NDC and credits against future commission amounts due by the Company to NDC. The
Series E preferred stock was subsequently converted into 1,250,000 shares of
common stock and the Class A common stock was redesignated as common stock upon
completion of the Company's initial public offering (Note 8). $6,000,000 will be
expensed as used over the three-year life of the agreement. In addition, the
license fee of $4,000,000 will be amortized on a straight-line basis over the
life of the agreement.
11. EMPLOYMENT AGREEMENTS
The Company has employment agreements with several employees ranging
from one to five years, with commitments aggregating in each of the years ending
December 31 (in thousands); $1,485 in 2000, $1,234 in 2001, $470 in 2002 and
$163 in 2003 and $0 in 2004.
12. MAJOR CUSTOMERS
For the year ended December 31, 1999, there were no sales to a single
customer in excess of 10% of revenues. For the year ended December 31, 1998,
sales to two major customers represent 27% and 14%. For the year ended December
31, 1997, sales to three major customers represented 15%, 14% and 13%.
13. ADMINISTRATIVE SERVICES AGREEMENT
On April 1, 1996, the Company and SCP, a company controlled by the same
stockholders, entered into a administrative services agreement under which SCP
provided the Company with administrative, support services, and sufficient space
for the Company to conduct its business. This agreement had been extended
through April 30, 1999.
39
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company did not owe SCP any amounts under the
agreement compared to an aggregate due of $50,862 and $465,916 at December 31,
1998 and 1997, respectively. SCP provided services aggregating, $173,985,
$740,739 and $1,074,307 for the years ended December 31, 1999, 1998 and 1997,
respectively. In management's opinion, all of these services were provided and
paid for at a fair market value.
The Company and SCP have entered into a ten-year "Publishers' Circle
Agreement" whereby SCP grants the Company the right to distribute its content on
the Web and to provide the content for worldwide on-line search and retrieval.
Additionally, SCP agrees to promote the Company in its publications, and run
advertising in every issue of its journals. In return, SCP can sell all of the
Company's products including banner advertising for which SCP will receive a
commission.
14. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITION OF DIALOG MEDICAL
In February of 2000, the Company signed a plan of merger and
reorganization to acquire all of the outstanding shares of Dialog Medical, Inc.,
a Delaware corporation, in exchange for 150,000 shares of the Company's common
stock upon closing and an additional 125,000 shares subject to certain
performance criteria. Dialog Medical provides integrated patient education and
informed consent materials for physicians and consumers.
FORMATION OF MEDSCAPE EUROPE
On February 9, 2000 the Board of Directors approved the creation of
Medscape Europe to accelerate the Company's international expansion in the face
of rising global demand for Web-based health information and services. In
addition to its European venture, the Company already operates a
Japanese-language site, Medscape Japan.
MERGER WITH MEDICALOGIC
On February 21, 2000, the Company entered into an agreement to merge
with MedicaLogic, Inc. The Company's shareholders will receive 0.323 shares of
MedicaLogic common stock for each share of the Company's common stock. The
transaction will become effective upon approval by the shareholders of the two
companies and the satisfaction of other customary conditions. In connection with
the proposed transaction, the Company issued warrants to purchase 100,000 shares
of its common stock at $9.3125 per share to its financial advisor. Simultaneous
with the announcement of the merger with MedicaLogic, MedicaLogic announced that
it had agreed to acquire Total eMed, Inc., a provider of electronic medical
transcription services, for approximately eight million shares of MedicaLogic's
common stock.
40
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly results of operations
for 1998 and 1999. This unaudited information has been prepared on the same
basis as the audited consolidated financial statements. In the opinion of
management, this table includes all adjustments, consisting only of normal
recurring adjustments, that are considered necessary for a fair presentation of
the Company's financial position and results of operations for the quarters
presented.
<TABLE>
<CAPTION>
1999 Quarter Ended (in thousands)
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Revenue $ 1,644 $ 3,285 $ 2,209 $ 4,018
------- ------- ------- -------
Operating Expenses
Editorial, production,
content and technology 1,268 2,653 3,293 5,753
Sales and Marketing 1,247 2,682 4,866 18,149
General and administrative 562 891 1,882 2,713
Depreciation and amortization 95 130 193 592
Stock-based compensation 298 482 537 784
--- --- --- ---
Total Operating Expenses 3,470 6,838 10,771 27,991
----- ----- ------ ------
Loss from Operations (1,826) (3,553) (8,562) (23,973)
Interest expense (income) (81) (215) (191) (716)
---- ----- ----- -----
Net Loss ($1,745) ($3,338) ($8,371) ($23,257)
======= ======= ======= ========
Basic net loss per share ($0.25) ($0.46) ($0.46) ($0.52)
======= ======= ======= =======
Weighted average number of 6,871 7,291 18,356 44,680
===== ===== ====== ======
shares of common stock
outstanding
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended (in thousands)
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Revenue $ 551 $ 526 $ 479 $ 1,513
----- ----- ----- -------
Operating Expenses
Editorial, production,
Content and technology 404 509 565 1,216
Sales and Marketing 340 525 649 1,006
General and administrative 311 369 357 432
Depreciation and amortization 47 49 51 140
Stock-based compensation -- -- -- 249
-- -- -- ---
Total Operating Expenses 1,102 1,452 1,622 3,043
----- ----- ----- -----
Loss from Operations (551) (926) (1,143) (1,530)
Interest expense (income) (49) (100) (72) (28)
---- ----- ---- ----
Net Loss ($502) ($826) ($1,071) ($1,502)
====== ====== ======== ========
Basic net loss per share ($.18) ($.29) ($.35) ($0.26)
====== ====== ====== =======
Weighted average number of
shares of common stock
outstanding 2,820 2,848 3,030 5,825
===== ===== ===== =====
</TABLE>
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
Healthcare Communications Group, LLC
Potomac, Maryland
We have audited the accompanying balance sheets of Healthcare
Communications Group, LLC ("HCG") as of December 31, 1997 and October 27, 1998,
and the related statements of operations, members' capital, and cash flows for
the year ended December 31, 1997 and the ten months ended October 27, 1998.
These financial statements are the responsibility of HCG's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of HCG at December 31, 1997 and
October 27, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1997 and the ten months ended October 27, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 9, 1999
42
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
BALANCE SHEETS
DECEMBER 31, 1997 AND OCTOBER 27, 1998
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27,
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2).............. $ 54,286 $ 14,081
Accounts receivable............................. 520,388 1,190,359
Prepaid expenses and other assets............... 116,063 54,730
--------- -----------
Total current assets.................... 690,737 1,259,170
Property and equipment-- net (Note 3)............. 29,875 76,777
Intangible assets-- net........................... 6,800 5,383
--------- -----------
Total assets............................ $ 727,412 $ 1,341,330
========= ===========
LIABILITIES AND MEMBERS' CAPITAL (DEFICIENCY IN
CAPITAL)
Liabilities:
Accounts payable................................ $ 121,306 $ 23,012
Accrued expenses................................ 47,243 56,946
Demand note due to Medscape, Inc. (Note 4)...... -- 275,000
Deferred revenue (Note 2)....................... 190,000 1,121,193
--------- -----------
Total liabilities....................... 358,549 1,476,151
Commitments (Note 4)
Members' capital (deficiency in capital).......... 368,863 (134,821)
--------- -----------
Total liabilities and members' capital.. $ 727,412 $ 1,341,330
========= ===========
</TABLE>
See notes to financial statements.
43
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
TEN MONTHS ENDED OCTOBER 27, 1998
TEN
YEAR MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 27,
1997 1998
Revenues................................. $3,155,504 $ 2,584,615
---------- -----------
Operating expenses:
Editorial, production, content and 1,853,118 1,736,351
technology...........................
General and administration............. 923,547 867,970
Depreciation and amortization.......... 4,231 9,419
---------- -----------
Total operating expenses....... 2,780,896 2,613,740
---------- -----------
Income (loss) from operations............ 374,608 (29,125)
Interest income........................ (2,965) (1,542)
---------- -----------
Net income (loss)........................ $ 377,573 $ (27,583)
========== ===========
See notes to financial statements.
44
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF MEMBERS' CAPITAL (DEFICIENCY IN CAPITAL)
FOR THE TEN MONTHS ENDED OCTOBER 27, 1998 AND
YEAR ENDED DECEMBER 31, 1997
Members' capital, January 1, 1997.............. $ 148,636
Net income for the year ended December 31, 377,573
1997...........................................
Distribution to members during 1997.......... (157,346)
----------
Members' capital, December 31, 1997............ 368,863
Net loss for the ten months ended October 27, (27,583)
1998...........................................
Distribution to members during 1998.......... (476,101)
----------
Members' deficiency in capital, October 27, 1998 $ (134,821)
==========
See notes to financial statements.
45
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED OCTOBER 27, 1998
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27,
1997 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................. $ 377,573 $ (27,583)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization............... 4,231 9,419
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.. 1,148,237 (669,971)
Decrease in prepaid expenses................ 2,873 61,333
Increase (decrease) in accounts payable and
accruals.................................. 120,613 (88,591)
(Decrease) increase in deferred revenue..... (1,474,979) 931,193
----------- ---------
Net cash provided by operating activities 178,548 215,800
----------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment............. (27,412) (54,904)
----------- ---------
Net cash used in investing activities.. (27,412) (54,904)
----------- ---------
FINANCING ACTIVITIES
Distributions to members....................... (157,346) (476,101)
Demand note due to Medscape, Inc............... -- 275,000
----------- ---------
Net cash used in financing activities.. (157,346) (201,101)
----------- ---------
Decrease in cash and cash equivalents............ (6,210) (40,205)
Cash and cash equivalents, beginning of period... 60,496 54,286
----------- ---------
Cash and cash equivalents, end of period........ $ 54,286 $ 14,081
=========== =========
</TABLE>
See notes to financial statements.
46
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
TEN MONTHS ENDED OCTOBER 27, 1998 AND YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Healthcare Communications Group, ("HCG") is a Maryland limited
liability company, founded on November 17, 1995. HCG is a medical
communications/education company that develops, produces and distributes unique
live, print, digital and Internet-based programs for healthcare professionals
that are funded by pharmaceutical companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, HCG considers all
highly liquid short-term cash investments purchased with maturities of three
months or less as cash and cash equivalents.
CONCENTRATION OF CREDIT RISK
HCG's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents and trade accounts
receivable. HCG maintains its cash and cash equivalents in bank accounts which,
at times, exceeds federally insured limits. HCG has not experienced any losses
in these accounts. HCG believes it is not exposed to any significant credit risk
on cash and cash equivalents. Concentrations of credit risks with respect to
accounts receivable are limited because of HCG's expanding customer base and
credit worthiness of its three major customers (see Note 5), making up the
majority of the accounts receivable balance.
DEPRECIATION AND AMORTIZATION
HCG provides for depreciation of property and equipment based on the
estimated useful lives of the applicable assets and the life of leases, using
the straight-line method.
Expenditures for renewals and improvements which extend the useful
lives of assets are capitalized, while maintenance and repairs are charged to
operations as incurred.
Intangible assets consists of trademarks which are being amortized
using the straight-line method over their estimated useful life.
REVENUE RECOGNITION
Revenue from custom programs, such as on-line conference summaries and
custom modules produced by HCG, are recognized on a percentage of completion
basis. Revenues from conferences and other events produced by HCG are recognized
upon completion of the conference or event. At December 31, 1997 and October 27,
1998, there were no uncompleted projects.
47
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents amounts billed in excess of revenues
recognized. Included in accounts receivable are amounts due (under contract)
relating to deferred revenue.
IMPAIRMENT OF ASSETS
HCG's long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur, HCG measures
impairment by comparing the carrying value of the long-lived asset to the
estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows is less than the carrying amount of the assets, HCG would
recognize an impairment loss. HCG determined that, as of December 31, 1997 and
October 27, 1998, there had been no impairment in the carrying value of the
long-lived assets.
INCOME TAXES
Under present income tax regulations, HCG pays no federal, state or
local income taxes. For tax purposes, any income or loss is included in the
income tax returns of the members.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components. HCG has no
elements of comprehensive income. HCG operates in one segment in the United
States.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and hedging activities for HCG's year ended
December 31, 2000. Generally, it requires that an entity recognize all
derivatives as either an asset or liability and measure those instruments at
fair value, as well as identify the conditions for which a derivative may be
specifically designated as a hedge. Management is currently evaluating the
effect of this statement on HCG's financial statements.
During 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP No. 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. This statement is applicable to HCG's 1999 financial statements and will
require HCG to capitalize various payroll and payroll related costs and other
costs that are directly related to the development of some of the systems of
HCG. HCG will amortize these costs over the anticipated life of the systems.
Management is currently evaluating the effect of this statement on HCG's
financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27, USEFUL LIFE
DESCRIPTION 1997 1998 (IN YEARS)
<S> <C> <C> <C>
Computers and equipment.... $26,441 $ 79,507 5
Furniture and fixtures..... 6,959 8,797 7
------- --------
33,400 88,304
Less accumulated depreciation (3,525) (11,527)
Property and equipment -- net $29,875 $ 76,777
======= ========
</TABLE>
48
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEMAND NOTE
As of October 27, 1998, the demand note consists of $215,000 and
$60,000, borrowed on October 26 and October 23, 1998, respectively, from
Medscape, Inc. at an annual interest rate of 8% (Note 6). Under the terms of the
demand note, HCG was required to use the proceeds to pay amounts owed to vendors
prior to the acquisition by Medscape, Inc.
5. MAJOR CUSTOMERS
Sales to three major customers for the year ended December 31, 1997 and
the ten months ended October 27, 1998 represented 53% and 50% of total sales,
respectively. At December 31, 1997 and October 27, 1998, these three customers
represented 34% and 76% accounts receivable, respectively.
6. SUBSEQUENT EVENT
Effective October 27, 1998, the membership interests of HCG were
purchased by Medscape, Inc., a New York corporation.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no such changes or disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Items 10, 11, 12 and 13 is incorporated herein
by reference to the information under the captions "Election of Directors,"
"Executive Compensation," "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions," respectively,
to be set forth in the Company's definitive Proxy Statement or an Amendment to
this Form 10-K to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Information concerning executive officers is
incorporated herein by reference to the information included in Part I, Item
4(a) of this report under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information required by Items 10, 11, 12 and 13 is incorporated herein by
reference to the information under the captions "Election of Directors,"
"Executive Compensation," "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions," respectively,
to be set forth in the Company's definitive Proxy Statement or an Amendment to
this Form 10-K to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Items 10, 11, 12 and 13 is incorporated herein
by reference to the information under the captions "Election of Directors,"
"Executive Compensation," "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions," respectively,
to be set forth in the Company's definitive Proxy Statement or an Amendment to
this Form 10-K to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Items 10, 11, 12 and 13 is incorporated herein
by reference to the information under the captions "Election of Directors,"
"Executive Compensation," "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions," respectively,
to be set forth in the Company's definitive Proxy Statement or an Amendment to
this Form 10-K to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in Item 14(a) are filed or
incorporated herein by reference as part of this annual
report. See Index to Financial Statements and Financial
Schedule as Item 8 on Page 21.
2. Financial Statement Schedule
Schedules have been omitted since they are either not required
or are not applicable or the required information is shown in
the financial statements or related notes.
3. Exhibits:
<TABLE>
<CAPTION>
<S> <C> <C>
2.1 Purchase Agreement between Medscape, Inc. and
the holders of all of the membership interests
of Healthcare Communications Group, L.L.C.
dated October 27, 1998.
2.2 Letter Agreement between Medscape, Inc. and
Ira Kirshenbaum, M.D., dated February 2, 1999
regarding the sale of assets of bonehome.com.
2.3 Bill of Sale between Medscape, Inc. and
CompuRx Inc., dated March 25, 1999.
2.4 Form of Agreement and Plan of Merger dated
February 18, 2000 among Medscape, Inc., Dialog
Medical, Inc. and Medlog Acquisition Inc.
2.5 Agreement of Reorganization and Merger dated
February 21, 2000 among MedicaLogic, Inc.,
Medscape, Inc. and Moneypenny Merger Corp.
3.1 Amended and Restated Certificate of
Incorporation.
3.2 Bylaws.
4.1 Form of Specimen Common Stock Certificate.
4.2 Form of Warrant, dated as of March 5, 1999,
entitling Credit Suisse First Boston
Corporation to purchase up to 14,667.5 shares
of Registrant's Common Stock.
4.3 Warrant, dated September 3, 1999, entitling
America Online, Inc. to purchase 1,352,158
shares of Registrant's Class A Common Stock.
4.4 Performance Warrant, dated September 3, 1999,
entitling America Online, Inc. to purchase
1,352,158 shares of Registrant's Class A
Common Stock.
4.5 Form of Warrant, dated as of February 15,
2000, entitling Lazard Freres & Co. LLC to
purchase 100,000 shares of Registrant's Common
Stock
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.1 Agreement of Lease between Medscape, Inc. and
R.A.A. Realty Company LP dated February 1999.
10.2 Lease Assignment made by SCP Communications,
Inc. made in favor of Medscape, Inc.
10.3 Agreement of Lease between Surgical Care
Publishing, Inc. and Satyanman, Inc., dated
October 7, 1996.
10.4 Agreement of Lease between Surgical Care
Publishing, Inc. and Satyanman, Inc., dated
August 29, 1995.
10.5 Agreement of Lease between Surgical Care
Publishing, Inc., and Satyanman, Inc., dated
March 17, 1994.
10.6 Agreement of Lease between Surgical Care
Publishing, Inc. and Satyanman, Inc., dated
August 18, 1993.
10.7* Employment Agreement between Medscape, Inc.
and Paul T. Sheils, dated January 26, 1998.
10.8* Employment Agreement between Medscape, Inc.
and Steven Kalin, dated September 30, 1998.
10.9* Employment and Restricted Stock Purchase
Agreement between Medscape, Inc. and Jeffrey
L. Drezner, M.D., Ph.D., dated October 27,
1998.
10.10* Promissory Note dated October 27, 1998, in the
principal amount of $627,949.64 made by
Jeffrey L. Drezner, M.D., Ph.D. in favor of
Medscape, Inc.
10.11* Employment Agreement between Medscape, Inc.
and Peter M. Frishauf, dated February 16,
1998.
10.12* Employment Agreement between Medscape, Inc.
and George D. Lundberg, M.D., dated February
15, 1999.
10.13* Employment Agreement between Medscape, Inc.
and David Yakimischak, dated March 15, 1999.
10.14* Employment Agreement between Medscape, Inc.
and Meg Walsh, dated March 4, 1999.
10.15* 1996 Stock Option Plan.
10.16* Form of Incentive Stock Option Agreement.
10.17* Form of Non-Qualified Stock Option Agreement.
10.18* Nonemployee Director Option Agreement.
10.19 Series D Preferred Stock Purchase Agreement
between Medscape, Inc. and investors, dated
March 5, 1999.
* Management contract or compensatory plan or arrangement.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.20 Amendment and Restated Stockholder's
Agreement, dated 10.20 August 4, 1999. Form
of Amendment, dated September 8, to the
Amended and Restated Stockholders' Agreement
dated August 4, 1999 and Consent to Conversion
of Preferred Stock.
10.21 Form of Letter to Authors.
10.22 Preferred Share Purchase Agreement among
Softwatch Ltd., Medscape, Inc. (as a
purchaser) and certain other purchasers, dated
June 15, 1999.
10.23 License and Web Site Development Agreement
between Medscape, Inc. and Softwatch, Inc.,
dated June 15, 1999.
10.24* Employment Agreement between Medscape, Inc.
and Mark Boulding, dated June 28, 1999.
10.25 Common Stock Purchase Agreement between
Medscape, Inc. and CBS Corporation, dated as
of July 4, 1999.
10.26 Form of Stockholders Agreement between
Medscape, Inc. and CBS Corporation, dated July
of 1999.
10.27 Form of Joinder Agreement among certain
Medscape, Inc. shareholders, dated July
of1999, in connection with the Stockholder
Agreement dated July of 1999.
10.28 Form of Advertising and Promotion Agreement
between Medscape, Inc. and CBS Corporation,
dated July of 1999.
10.29 Form of Trademark and Content Agreement
between Medscape, Inc. and CBS Corporation,
dated July of 1999.
10.30 Form of Registration Rights Agreement between
Medscape, Inc. and CBS Corporation, dated July
of 1999.
10.31 Stock Purchase Agreement between Medscape,
Inc. and National Data Corporation, dated July
7, 1999.
10.32 Form of License and Product Development
Agreement between Medscape, Inc. and National
Data Corporation, dated July of 1999.
10.33 Agreement of Lease between Medscape, Inc. and
224 W 30 LLC, dated May 26, 1999.
10.34 License Agreement between First Databank, Inc.
and Medscape, Inc., dated April 1, 1997.
10.35 Form of Subscription Agreement with CBS
Corporation.
10.36 Interactive Services Agreement between America
Online, Inc. and Medscape, Inc. dated
September 3, 1999.
10.37 Side letter between America Online, Inc. and
Medscape, Inc. dated September 22, 1999 in
connection with the
</TABLE>
* Management contract or compensatory plan or arrangement.
53
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Interactive Services Agreement.
10.38 Agreement among America Online, Inc., CBS
Corporation and Medscape, Inc. in regard to
registration rights, dated September 3, 1999.
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
</TABLE>
(b) Reports on Form 8-K
Registrant filed a report on form 8-K under Item 5 on March 2, 2000
reporting that on February 21, 2000, Registrant entered into an
agreement with MedicaLogic, Inc. providing for the merger of a
newly-formed subsidiary of MedicaLogic with and into Registrant subject
to certain conditions.
54
<PAGE>
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
MEDSCAPE, INC.
Date: March 10, 2000 By: /s/ PAUL T. SHEILS
-----------------------------------------
Paul T. Sheils
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: March 10, 2000 By: /s/ PAUL T. SHEILS
-----------------------------------------
Paul T. Sheils
Director, President and Chief
Executive Officer
(Principal Executive Officer)
Date: March 10, 2000 By: /s/ STEVE R. KALIN
-----------------------------------------
Steve R. Kalin
Chief Operating Officer and Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
Date: March 10, 2000 By: /s/ MARC BUTLEIN
-----------------------------------------
Marc Butlein
Director
Date: March 10, 2000 By: /s/ ESTHER DYSON
-----------------------------------------
Esther Dyson
Director
Date: March 10, 2000 By: /s/ ANDREW HEYWARD
-----------------------------------------
Andrew Heyward
Director
Date: March 10, 2000 By: /s/ ALAN J. PATRICOF
-----------------------------------------
Alan J. Patricof
Chairman of the Board
Date: March 10, 2000 By: /s/ FREDRIC G. REYNOLDS
-----------------------------------------
Fredric G. Reynolds
Director
Date: March 10, 2000 By: /s/ CARLO A. VON SCHROETER
-----------------------------------------
Carlo A. von Schroeter
Director
Date: March 10, 2000 By: /s/ OAKLEIGH THORNE
-----------------------------------------
Oakleigh Thorne
Director
Date: March 10, 2000 By: /s/ PETER FRISHAUF
-----------------------------------------
Peter Frishauf
Director
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION HOW FILED
NUMBER ----------- ---------
<S> <C> <C>
2.1 Purchase Agreement between Medscape, Inc. and the holders of (1)
all of the membership interests of Healthcare Communications
Group, L.L.C. dated October 27, 1998.
2.2 Letter Agreement between Medscape, Inc. and Ira Kirshenbaum, (1)
M.D., dated February 2, 1999 regarding the sale of assets of
bonehome.com.
2.3 Bill of Sale between Medscape, Inc. and CompuRx, Inc. (1)
dated March 25, 1999.
2.4 Form of Agreement and Plan of Merger dated February 18, 2000 among (3)
Medscape, Inc., Dialog Medical, Inc. and Medlog Acquisition Inc.
2.5 Agreement of Reorganization and Merger dated February 21, 2000 (2)
among MedicaLogic, Inc., Medscape, Inc. and Moneypenny Merger
Corp.
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Form of Specimen Common Stock Certificate. (1)
4.2 Form of Warrant, dated as of March 5, 1999, entitling Credit (1)
Suisse First Boston Corporation to purchase up to 14,667.5
shares of Registrant's Common Stock.
4.3 Warrant, dated September 3, 1999, entitling America Online, (1)
Inc. to purchase 1,352,158 shares of Registrant's Class A
Common Stock.
4.4 Performance Warrant, dated September 3, 1999, entitling America (1)
Online, Inc. to purchase 1,352,158 shares of Registrant's Class
A Common Stock.
4.5 Form of Warrant, dated as of February 15, 2000, entitling (3)
Lazard Freres & Co. LLC to purchase 100,000 shares of
Registrant's Common Stock
10.1 Agreement of Lease between Medscape, Inc. and R.A.A. Realty (1)
Company LP dated February 1999.
</TABLE>
- --------------------------------------------------------------------------------
(1) Previously filed together with Registrant's Registration Statement on Form
S-1 which went effective September 27, 1999.
(2) Previously filed together with Registrant's Current Report on Form 8-K on
March 2, 2000.
(3) Filed herewith.
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 Lease Assignment made by SCP Communications, Inc. made in favor (1)
of Medscape, Inc.
10.3 Agreement of Lease between Surgical Care Publishing, Inc. and (1)
Satyanman, Inc., dated October 7, 1996.
10.4 Agreement of Lease between Surgical Care Publishing, Inc. and (1)
Satyanman, Inc., dated August 29, 1995.
10.5 Agreement of Lease between Surgical Care Publishing, Inc., and (1)
Satyanman, Inc., dated March 17, 1994.
10.6 Agreement of Lease between Surgical Care Publishing, Inc. and (1)
Satyanman, Inc., dated August 18, 1993.
10.7* Employment Agreement between Medscape, Inc. and Paul T. Sheils, (1)
dated January 26, 1998.
10.8* Employment Agreement between Medscape, Inc. and Steven Kalin, (1)
dated September 30, 1998.
10.9* Employment and Restricted Stock Purchase Agreement between (1)
Medscape, Inc. and Jeffrey L. Drezner, M.D., Ph.D., dated
October 27, 1998.
10.10* Promissory Note dated October 27, 1998, in the principal amount (1)
of $627,949.64 made by Jeffrey L. Drezner, M.D., Ph.D. in favor
of Medscape, Inc.
10.11* Employment Agreement between Medscape, Inc. and Peter M. Frishauf, (1)
dated February 16, 1998.
10.12* Employment Agreement between Medscape, Inc. and George D. (1)
Lundberg, M.D., dated February 15, 1999.
10.13* Employment Agreement between Medscape, Inc. and David (1)
Yakimischak, dated March 15, 1999.
10.14* Employment Agreement between Medscape, Inc. and Meg Walsh, (1)
dated March 4, 1999.
10.15* 1996 Stock Option Plan. (1)
10.16* Form of Incentive Stock Option Agreement. (1)
10.17* Form of Non-Qualified Stock Option Agreement. (1)
10.18* Nonemployee Director Option Agreement. (1)
10.19 Series D Preferred Stock Purchase Agreement between Medscape, (1)
Inc. and investors, dated March 5, 1999.
</TABLE>
- --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
(1) Previously filed together with Registrant's Registration Statement on Form
S-1 which went effective September 27, 1999.
57
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.20 Amendment and Restated Stockholder's Agreement, dated August 4, (1)
1999.
10.20 Form of Amendment, dated September 8, to the Amended and (1)
Restated Stockholders' Agreement dated August 4, 1999 and
Consent to Conversion of Preferred Stock.
10.21 Form of Letter to Authors. (1)
10.22 Preferred Share Purchase Agreement among Softwatch Ltd., (1)
Medscape, Inc. (as a purchaser) and certain other purchasers,
dated June 15, 1999.
10.23 License and Web Site Development Agreement between Medscape, (1)
Inc. and Softwatch, Inc., dated June 15, 1999.
10.24* Employment Agreement between Medscape, Inc. and Mark Boulding, (1)
dated June 28, 1999.
10.25 Common Stock Purchase Agreement between Medscape, Inc. and CBS (1)
Corporation, dated as of July 4, 1999.
10.26 Form of Stockholders Agreement between Medscape, Inc. and CBS (1)
Corporation, dated July of1999.
10.27 Form of Joinder Agreement among certain Medscape, Inc. (1)
shareholders, dated July of1999, in connection with the
Stockholder Agreement dated July of 1999.
10.28 Form of Advertising and Promotion Agreement between Medscape, (1)
Inc. and CBS Corporation, dated July of 1999.
10.29 Form of Trademark and Content Agreement between Medscape, Inc. (1)
and CBS Corporation, dated July of 1999.
10.30 Form of Registration Rights Agreement between Medscape, Inc. (1)
and CBS Corporation, dated July of 1999.
10.31 Stock Purchase Agreement between Medscape, Inc. and National (1)
Data Corporation, dated July 7, 1999.
10.32 Form of License and Product Development Agreement between (1)
Medscape, Inc. and National Data Corporation, dated July of
1999.
10.33 Agreement of Lease between Medscape, Inc. and 224 W 30 LLC, (1)
dated May 26, 1999.
10.34 License Agreement between First Databank, Inc. and Medscape, (1)
Inc., dated April 1, 1997.
</TABLE>
- --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
(1) Previously filed together with Registrant's Registration Statement on Form
S-1 which went effective September 27, 1999.
58
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.35 Form of Subscription Agreement with CBS Corporation. (1)
10.36 Interactive Services Agreement between America Online, Inc. and (1)
Medscape, Inc. dated September 3, 1999.
10.37 Side letter between America Online, Inc. and Medscape, Inc. (1)
dated September 22, 1999 in connection with the Interactive
Services Agreement.
10.38 Agreement among America Online, Inc., CBS Corporation and (1)
Medscape, Inc. in regard to registration rights, dated
September 3, 1999.
21 Subsidiaries of Registrant (3)
23 Independent Auditors' Consent
</TABLE>
- --------------------------------------------------------------------------------
(1) Previously filed together with Registrant's Registration Statement on Form
S-1 which went effective September 27, 1999.
(3) Filed herewith.
59
AGREEMENT AND PLAN OF MERGER
by and among
MEDLOG ACQUISITION INC.,
MEDSCAPE, INC.,
DIALOG MEDICAL, INC.,
MICHAEL J. BURKE,
JAMES E. GOTTESMAN, M.D.
and
NEIL H. BAUM, M.D.
Dated as of_February 18, 2000
<PAGE>
INDEX TO SCHEDULES
------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule 1.6(c) - The Dialog Shareholder and Non-founding
Shareholders and the Number of Conversion Issuance Shares Deliverable to
each shareholder and Allocation of Contingent
Rights
Schedule 1.6(e)(i)- Number of Initial Contingent Shares
Deliverable to the Dialog
Shareholders and Dialog Non-founding Shareholders
Schedule 1.6(e)(ii) - Number of Remaining Contingent Shares Deliverable
to the Dialog Shareholders and Dialog
Non-founding Shareholders
Schedule 2.1 - Jurisdictions of Qualification
Schedule 2.3 - Authorization
Schedule 2.5 - Ownership of Shares
Schedule 2.8(a) - Balance Sheets
Schedule 2.8(b) - Income Statements
Schedule 2.8(d) - Accounts Receivable
Schedule 2.9 - Taxes
Schedule 2.10 - Legal Proceedings
Schedule 2.11 - Labor and Employee Benefit Matters
Schedule 2.12 - Violations of Law
Schedule 2.13 - Insurance
Schedule 2.14 - Contracts
Schedule 2.15 - Affiliate Transactions
Schedule 2.16 - Environmental Matters
Schedule 2.17 - Real Property
Schedule 2.18 - Information Technology
Schedule 2.19 - Data and Databases
Schedule 2.20 - Intellectual Property
Schedule 2.21 - Bank Accounts
Schedule 2.22 - Adverse Changes
Schedule 2.23 - Major Customers; Relationship with Customers and Suppliers
Schedule 2.24 - Physicians' Contracts
Schedule 2.25 - Undisclosed Liabilities
</TABLE>
MEDSCAPE SCHEDULES:
-------------------
Schedule 3.16 - Adverse Changes - Medscape
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of February 18 __, 2000
(this "AGREEMENT") is among Medscape, Inc. ("MEDSCAPE"), a Delaware corporation,
Medlog Acquisition Inc. ("MAC"), a Delaware corporation, Dialog Medical, Inc.
("DIALOG"), a Delaware corporation, and Michael J. Burke, James E. Gottesman,
M.D., and Neil H. Baum, M.D. (each a "DIALOG SHAREHOLDER" and, collectively, the
"DIALOG SHAREHOLDERS"), and together with Dialog, collectively the "DIALOG
PARTIES"). The parties wish to effect the acquisition of Dialog by Medscape
through a merger of MAC into Dialog on the terms and conditions hereof. This
Agreement is intended to be a "PLAN OF REORGANIZATION" within the meaning of
ss.368(a) of the Internal Revenue Code of 1986, as amended (the "CODE").
Accordingly, in consideration of the mutual representations, warranties
and covenants contained herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions hereof,
and in accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), MAC shall be merged with and into Dialog (the "MERGER"). The Merger
shall occur at the Effective Time (as defined herein). Following the Merger,
Dialog shall continue as the surviving corporation (the "SURVIVING CORPORATION")
and the separate corporate existence of MAC shall cease.
1.2 EFFECTIVE TIME. As soon as practicable after satisfaction or waiver
of all conditions to the Merger, the parties shall cause a Certificate of Merger
to be filed in accordance with Section 252 of the DGCL (the "MERGER
CERTIFICATE") and shall take all
<PAGE>
such further actions as may be required by law to make the Merger effective. The
Merger shall be effective at such time as the Merger Certificate is filed with
the Secretary of State of the State of Delaware in accordance with the DGCL or
at such later time as is specified in such documents (the "EFFECTIVE TIME").
Immediately prior to the filing of the Merger Certificate, a closing (the
"CLOSING") will at the offices of Medscape at 134 West 29th Street, New York,
New York, 10001, (or at such other place or other manner as the parties may
agree) for the purposes of confirming satisfaction or waiver of all conditions
to the Merger. Subject to satisfaction or waiver of each of the conditions
specified in Article VI hereof, the Closing shall take place on such date as the
parties may agree, but not later than __March 31______, 2000. The date on which
the Closing occurs is referred to herein as the "CLOSING DATE."
1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth
in Section 259, 260 and 261 of the DGCL.
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and Bylaws of Dialog, in each case as in effect immediately prior
to the Effective Time shall be the Certificate of Incorporation and Bylaws of
the Surviving Corporation immediately after the Effective Time, until duly
amended in accordance with applicable law.
1.5 DIRECTORS AND OFFICERS. The directors and officers of MAC
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation immediately after the Effective Time, each such
officer and director to hold office in accordance with their respective terms.
1.6 CONVERSION OF STOCK.
(a) MERGER CONSIDERATION. For purposes of this Agreement, "MERGER CONSIDERATION"
means:
(i) 150,000 shares of common stock, $0.01 par value per share, of Medscape
(the "CONVERSION ISSUANCE Shares"),
<PAGE>
(ii) in the event Medscape Common Stock falls below ten dollars and fifty
cents ($10.50) per share, (as adjusted for any stock split, stock
dividend or similar stock recapitalization or merger, or
reorganization) prior to the filing of a registration statement to
register the resale of the Conversion Issuance Shares based on the
average closing price of Medscape Common Stock on NASDAQ (or any
shares into which such is converted) over a twenty (20) trading day
period, five (5) trading days prior to the filing of the registration
statement to register the resale of the Conversion Issuance Shares
(the "Average Closing Price"), the number of Conversion Issuance
Shares shall be increased so that the total number of shares of
Medscape Common Stock comprising the Conversion Shares times the
Average Closing Price is equal to $1,575,000 (the "Conversion Issuance
Share Price") ; and
(iii) the right, subject to the provisions of Section 1.6(d) below, to
receive up to an additional 125,000 shares of Medscape Common Stock
(the "CONTINGENT SHARES" and together with the Conversion Issuance
Shares, the "MEDSCAPE SHARES") contingent upon the achievement of
certain revenue milestones by the Surviving Corporation as more fully
set forth in Section 1.6(d) (the "CONTINGENT RIGHTS").
(b) CONVERSION. At the Effective Time, by virtue of the Merger and without any
action on the part of Medscape or Dialog:
(i) All shares of Common Stock of Dialog, $0.01 par value per share (the
"DIALOG COMMON STOCK") and all shares of Preferred Stock of Dialog,
$0.01 par value per share (the "DIALOG PREFERRED Stock", and
collectively, with the Dialog Common Stock, the "DIALOG STOCK")
outstanding immediately prior to the Effective Time, shall be
converted into and become the right to receive in accordance with
Section 1.6(c) and 1.6(d)
<PAGE>
(subject to the payment of cash for fractional shares as provided in
Section 1.9): (x) the Conversion Issuance Shares, and (y), the
Contingent Rights.
(ii) All shares of Dialog Stock held at the Effective Time by Dialog as
treasury stock or by a subsidiary of Dialog shall be canceled and no
payment shall be made with respect thereto.
(iii) All shares of Common Stock of MAC, $0.01 par value per share,
outstanding immediately prior to the Effective Time, shall be
converted into the right to receive the same number of shares of
Surviving Corporation.
(c) ALLOCATION OF MERGER CONSIDERATION. The Merger Consideration shall be
allocated among the holders of shares of Dialog Stock outstanding
immediately prior to the Effective Time by allocating to each such holder
of Dialog Stock outstanding at the Effective Time as more fully set forth
in Schedule 1.6(c).
(d) CONTINGENT RIGHTS. As further consideration for the Merger, and subject to
the other provisions of this Section 1.6:
(i) if the Business shall have (x) achieved "REVENUE", as more fully
described in the Employment Agreement, equal to or exceeding
$1,750,000 (ONE MILLION SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS) for
the period beginning on the Closing Date and ending on the first
anniversary thereof, and (y) completed the development of Resource
Version 3.0, then Medscape shall issue, in the aggregate, to
Contingent Rights Holders (named on Schedule 1.6(e)(i)) _sixty-two
thousand five hundred (62,500) of the Contingent Shares (the "INITIAL
CONTINGENT SHARES"). Further, if the Business shall have achieved
Revenue equal to or exceeding $1,000,000
<PAGE>
(ONE MILLION DOLLARS) at any time during the period beginning on the
Closing Date and ending on the first anniversary thereof, then
Medscape shall issue to Contingent Rights Holders fifty percent (50%)
of the Initial Contingent Shares. The Initial Contingent Shares shall
be allocated among the Contingent Rights Holders as more fully set
forth in Schedule 1.6(d)(i).
(ii) if the Business shall have achieved "REVENUE, as more fully described
in the Employment Agreement of not less than $3,500,000 (THREE
MILLION FIVE HUNDRED THOUSAND DOLLARS) for the period beginning on
the day immediately following the first anniversary hereof and ending
on the second anniversary hereof, then Medscape shall issue, in the
aggregate, to the Contingent Rights Holders the remaining number of
the Contingent Shares (the "REMAINING CONTINGENT SHARES" and together
with the Initial Contingent Shares, the "Contingent Shares").
Further, if the Business shall have achieved Revenue equal to or
exceeding $2,500,000 (TWO MILLION FIVE HUNDRED THOUSAND DOLLARS) at
any time during the period beginning on the Closing Date and ending
on the first anniversary thereof, then Medscape shall issue to the
Contingent Rights Holders fifty percent (50%) of the Remaining
Contingent Shares. The Remaining Contingent Shares shall be allocated
as more fully set forth in Schedule 1.6(d)(ii).
(iii) In the event that the Business does not achieve Revenue, as more
fully described in the Employment Agreement, equal to $1,750,000 (ONE
MILLION SEVEN HUNDRED FIFTY THOUSAND DOLLARS) at the end of the first
anniversary of the Closing date but does achieve Revenue equal to or
exceeding $5,250,000 (FIVE MILLION TWO HUNDRED FIFTY THOUSAND
DOLLARS) at the end of the second anniversary of the
<PAGE>
Closing Date, then the Contingent Rights Holders shall receive one
hundred percent (100%) of the Initial Contingent Shares and one hundred
percent (100%) of the Remaining Contingent Shares.
For Purposes hereof, "Contingent Rights Holders" means the Dialog
Shareholders, other than the Non-Founding Shareholders. The Contingent
Rights Holders shall not be entitled to receive, and Medscape shall
have no obligation to issue, the portion of the Contingent Shares
allocable to Contingent Rights Holders if to the extent that the
foregoing Revenue targets are not met.
(e) ADJUSTMENT. The Merger Consideration (including, for the avoidance of
doubt, the Contingent Shares, and any additonal shares issued under
1.6(a)(ii)) shall be adjusted in the event of any change in Medscape Common
Stock by reason of stock splits, stock dividends, stock recapitalizations,
combinations or subdivisions of the Common Stock of Medscape, mergers or
other exchanges or conversion of shares by operation of law or the like
occurring after the date of this Agreement, such that, after the record
date therefor the Merger Consideration shall be equal to the number and
class of shares or other securities or property that would have been
received in respect of a share of Medscape Common Stock, as the case may
be.
1.7 CLOSING OF DIALOG TRANSFER BOOKS. At the Effective Time, the stock
transfer books of Dialog shall be closed and no transfer of Dialog Stock shall
thereafter be made.
1.8 ISSUANCE OF MEDSCAPE CERTIFICATES. The shares of Dialog Stock
outstanding immediately prior to the Effective Time (and any certificates
representing such shares) shall be deemed canceled as of the Effective Time.
Medscape Common Stock into which Dialog Stock shall be converted in the Merger
shall be deemed to have
<PAGE>
been issued at the Effective Time. The surrender and exchange of the Dialog
Shares for the Merger Consideration shall occur at the Closing.
1.9 NO FRACTIONAL SHARES. No certificates representing fractional
shares of Medscape Common Stock shall be issued upon the surrender of Dialog
Stock certificates for exchange into the Merger Consideration (including, for
the avoidance of doubt, the Contingent Shares, and any additonal shares issued
under 1.6(a)(ii)). No fractional interest shall entitle the owner to vote or to
any rights of a security holder. In lieu of fractional shares, each stockholder
who would otherwise have been entitled to a fractional share of Medscape Common
Stock, will receive from Medscape at Closing (or other applicable date) an
amount in cash (without interest) determined by multiplying such fraction by the
fair market value of a share of Medscape Common Stock. Such fair market value
shall equal the mean of the daily high and low sales prices of the Medscape
Common Stock on the NASDAQ National Market, as reported by NASDAQ, averaged over
the period of ten (10) trading days ending on the fifth trading day prior to the
Closing Date (or such other applicable date).
1.10 CLOSING. (a) At the Closing:
(a) the Dialog Parties shall deliver to Medscape and MAC the following:
(i) stock certificates evidencing all of the Dialog Stock;
(ii) written resignations of each director and officer of Dialog effective
as of the Closing Date
(iii) the original minute books, stock record books and corporate seals, if
any of Dialog, and the original membership interest record books and
limited liability company records of the Predecessor Entity (as
defined below);
(iv) the certificates of the Dialog Shareholders' Representative described
in Sections 6.2(a) and (b) hereof;
<PAGE>
(v) all other documents, certificates and instruments required to be
delivered by the Dialog Parties at or prior to Closing pursuant to
Section 6.2 hereof and the other provisions of this Agreement; and
(vi) such other documents as Medscape and MAC or their counsel may
reasonably request to demonstrate satisfaction of the conditions and
compliance with the covenants set forth in this Agreement.
(vii) Promissory Note in the principle amount of $100,000.00 (ONE HUNDRED
THOUSAND DOLLARS), which shall accrue interest at a rate of six
percent (6%) per annum which shall become due and payable in full on
the date which is fifteen (15) months from the Closing, made by the
Dialog Shareholders in favor of Medscape on terms and conditions to be
negotiated by Medscape and the Dialog Shareholders,
(b) Medscape will deliver to the Dialog Shareholders' Representative (as
hereinafter defined) the following:
(i) stock certificates evidencing the Conversion Issuance Shares (1)
registered, in each case, in the name of the appropriate Dialog
Shareholder or the Dialog Non-founding Shareholder and evidencing that
number of shares allocable to such Dialog Shareholder or the Dialog
Non-founding Shareholder, as determined in accordance with Section
1.6(c);
(ii) the certificates of an executive officer of Medscape described in
Sections 6.1(a) and (b) hereof;
(iii) a check pursuant to the Promissory Note in the amount of $100,000.00.
(iv) an employment agreement for Michael J. Burke (the "Employment
Agreement") that will specify a salary in the amount of $100,000.00
(ONE
<PAGE>
HUNDRED THOUSAND DOLLARS) and other terms and conditions to be
negotiated by the Medscape and Michael J. Burke,
(v) a standard Medscape Stock Option Agreement granting Michael J. Burke
an option to purchase 20,000 (TWENTY THOUSAND) shares of Medscape
Common Stock,
(vi) a Registration Rights Agreement based on terms and conditions agreed
to by Medscape and the Dialog Shareholders and Non-founding Dialog
Shareholders,
(vii) all other documents, certificates and instruments required to be
delivered by Medscape at or prior to Closing pursuant to Section 6.1
hereof and the other provisions of this Agreement; and
(viii) such other documents as the Dialog Shareholders' Representative or
the Dialog Shareholders' counsel may reasonably request to
demonstrate satisfaction by Medscape of the conditions and compliance
with its covenants set forth in this Agreement; and
(c) MAC will deliver to the Dialog Shareholders' Representative the following:
(i) the certificates of an executive officer of MAC described in Sections
6.1(a) and (b) hereof; (ii) all other documents, certificates and
instruments required to be delivered by MAC at or prior to Closing
pursuant to Section 6.1 hereof and the other provisions of this
Agreement; and (iii) such other documents as the Dialog Shareholders'
Representative or the Dialog Shareholders' counsel may reasonably
request to demonstrate satisfaction by MAC of the conditions and
compliance with the covenants set forth in this Agreement.
1.11 EXCHANGE OF AND PAYMENT FOR DIALOG STOCK. (a) The surrender and
exchange of the certificates evidencing the Dialog Stock for (i) the Conversion
Issuance
<PAGE>
Shares and (ii) the grant of Contingent Rights shall occur at the Closing as
provided in Section 1.10. Until surrendered as contemplated in the preceding
sentence, any certificate which immediately prior to the Effective Time shall
have represented any Dialog Stock shall be deemed at and after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration.
(b) The Merger Consideration and cash in lieu of fractional shares thereof
shall be deemed, when issued or paid hereunder, to have been issued or paid, as
the case may be, in full satisfaction of all rights pertaining to the Dialog
Stock.
1.12 DIALOG SHAREHOLDERS' REPRESENTATIVE. Each of the Dialog Parties
hereby constitutes and appoints Michael J. Burke as the representative and
attorney-in-fact of such Dialog Shareholder (the "DIALOG SHAREHOLDERS'
REPRESENTATIVE") with full power and authority to act for all the Dialog Parties
under this Agreement, including to do and perform such acts as are specifically
required by this Agreement to be performed by the Dialog Shareholders'
Representative. The Dialog Shareholders' Representative shall not be liable to
any other Dialog Party for any actions taken by him pursuant to this power of
attorney except in the case of his willful misconduct. The Dialog Shareholders'
Representative may, on behalf of all the Dialog Parties, execute amendments to
this Agreement or waivers of any of the provisions hereof; PROVIDED that any
such amendment or waiver does not adversely affect one or more Dialog Party in a
manner which is materially different than each other Dialog Party. This power of
attorney shall be deemed coupled with an interest, shall survive and not be
affected by the bankruptcy or disability of any Dialog Party, and shall extend
to each Dialog Party's successors.
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DIALOG AND THE DIALOG SHAREHOLDERS
Each of the Dialog Shareholders, jointly and severally, hereby
represents and warrants on behalf of themselves and on behalf of the
Non-founding Dialog Shareholders (as defined in 2.5 below), to each of MAC and
Medscape as follows:
2.1 CORPORATE EXISTENCE AND QUALIFICATION OF DIALOG; BUSINESS OF
DIALOG. Dialog is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with all requisite corporate
power and corporate authority and all governmental licenses, authorizations,
consents and approvals required to own its properties and to conduct its
business as presently conducted and as presently proposed to be conducted.
Dialog is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary,
which jurisdictions are listed on SCHEDULE 2.1 hereto. The Dialog Shareholders'
Representative has delivered to Medscape and MAC true, correct and complete
copies of the Certificate of Incorporation and the Bylaws of Dialog and all
documents and certificates relating to the formation and conversion of the
Predecessor Entity (as hereinafter defined). The business of Dialog consists
solely of:
(a) the development, marketing and distribution of patient education/informed
consent software applications for use by physicians, including applications
pertaining to urology, OBGYN, orthopedics, cardiology, dermatology and
interventional radiology;
(b) the development and deployment of proprietary data and knowledge bases
pertaining to patient education and informed consent; and
(c) related activities; (the foregoing, collectively referred to as the
"BUSINESS"). Dialog is the successor entity to Dialog Medical, LLC, a
Delaware limited liability company (the "PREDECESSOR ENTITY").
<PAGE>
The conversion of the Predecessor Entity was effected as of August 27, 1999 in
accordance with all applicable law and was duly authorized by all appropriate
action on the part of the limited liability company.
2.2 NO CONFLICTS. The execution, delivery and performance by the
Dialog Parties of this Agreement, the consummation of the transactions
contemplated hereby and compliance by the Dialog Parties with the terms hereof
will not (a) violate, conflict with, cause an event of default under, give rise
to a right of termination, cancellation or acceleration of any right or
obligation of Dialog under, or result in the creation or imposition of any lien,
mortgage, security interest, charge, encumbrance or restriction (a "LIEN") on
any asset of Dialog or on the Dialog Stock under any agreement, instrument,
license, franchise, judgment, order, law, rule or regulation by which any Dialog
Party is bound or to which Dialog's property is subject, or (b) violate or
conflict with the Certificate of Incorporation or Bylaws of Dialog.
2.3 GOVERNMENTAL AUTHORIZATIONS. Except as set forth on SCHEDULE 2.3,
the execution, delivery and performance by each Dialog Party of this Agreement
and the consummation of the transactions contemplated hereby by each Dialog
Party do not require any action by or in respect of, or filing with, any court,
arbitrator, administrative agency or commission or governmental body, agency,
official or authority, domestic or foreign (a "GOVERNMENTAL ENTITY"), or any
individual, corporation, partnership, limited liability company, joint venture,
trust, business association or other entity ("PERSON," which term shall include
Governmental Entities), except for (a) such as have been or will be taken or
made prior to the Closing and (b) those, the absence of which would materially
impair or delay the ability of any Dialog Party to consummate the transactions
contemplated hereby.
2.4 CAPITALIZATION. The authorized capital stock of Dialog consists
solely of (a) one hundred thousand (100,000) shares of Common Stock, of which
ten thousand two hundred twenty-seven (10,227) are issued and outstanding as of
the date
<PAGE>
hereof; and (b) fifty thousand (50,000) shares of Preferred Stock, of which
three hundred and two (302) are issued and outstanding as of the date hereof.
All of such issued and outstanding shares of Dialog Stock are owned by the
Dialog Shareholders and Non-founding Dialog Shareholders. Dialog has not issued
any securities other than the Dialog Stock set forth above and no other capital
stock of Dialog is authorized or outstanding. All outstanding shares of Dialog
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. The Dialog Stock was not issued in violation of any federal or
state securities law or any other legal requirement. Other than this Agreement,
and except as set forth in Schedule 1.6(c),, there are no outstanding
subscriptions, rights, options, warrants, conversion rights, agreements or other
claims for the purchase or acquisition from Dialog or any Dialog Shareholder of
any shares of Dialog Stock or any other securities of Dialog or obligating
Dialog to issue, repurchase or otherwise acquire any shares of Dialog Stock or
any other securities of Dialog or any securities convertible into, exercisable
or exchangeable for, or otherwise entitling the holder to acquire any shares of
Dialog Stock or any other securities of Dialog.
2.5 OWNERSHIP OF DIALOG STOCK. Each Dialog Shareholder and each other
shareholder of Dialog set forth on Schedule 1.6(c) (the "Non-founding Dialog
Shareholder" and collectively the "Non-founding Dialog Shareholders") is the
sole record and beneficial holder of that number of shares of Dialog Stock set
forth opposite his name on SCHEDULE 2.5. Each Dialog Shareholder and
Non-founding Dialog Shareholder owns each of his shares of Dialog Stock free and
clear of all Liens and rights of others of any kind other than those created or
permitted under this Agreement or by Medscape and MAC.
2.6 BINDING EFFECT. Each Dialog Shareholder and Dialog has all
requisite capacity and authority to execute this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
<PAGE>
delivered by each Dialog Party. The execution and delivery of this Agreement by
the Dialog Parties and the consummation of the transactions contemplated hereby
by the Dialog Parties do not and will not require the approval of any Person.
Assuming the due execution and delivery of this Agreement by Medscape and MAC,
this Agreement constitutes a valid and binding obligation of each Dialog Party,
enforceable against such Dialog Party in accordance with its terms.
2.7 OTHER EQUITY INTERESTS. Dialog does not have, and has not had at
any time, any direct or indirect equity interest in any other corporation,
partnership, joint venture, limited liability company or other entity or any
commitment to acquire any such equity interest.
2.8 FINANCIAL STATEMENTS, BOOKS AND RECORDS AND ACCOUNTS RECEIVABLE.
(a) The unaudited balance sheet of Dialog as of December 31, , 1999
and the unaudited balance sheet of Dialog as of February 17, 2000, annexed
hereto as SCHEDULE 2.8(A) (collectively the "BALANCE SHEETS") have been prepared
from the books and records of Dialog and fairly present in all material respects
the financial position of Dialog as of the respective dates thereof in
conformity with generally accepted accounting principles consistently applied
("GAAP"), and include all adjustments required for a fair presentation.
(b) The unaudited statement of income of Dialog for the six months
ended December 31, 1999, and the unaudited statement of income and cash flows
for Dialog for the twelve months ended December 31, 1999, annexed hereto as
SCHEDULE 2.8(B) (collectively the "INCOME STATEMENTS" and, together with the
Balance Sheets, the "FINANCIAL STATEMENTS") have been prepared from the books
and records of Dialog and fairly present in all material respects the results of
operations of Dialog for the periods covered thereby in conformity with GAAP,
and include all adjustments required for a fair presentation.
<PAGE>
(c) The books of account, minute books, stock record books,
membership interest record books, and other records of Dialog and of the
Predecessor Entity, all of which have been made available to Medscape and MAC by
the Dialog Parties, are true, correct and complete. The minute books of Dialog
contain true, correct and complete records of all meetings of, and corporate or
other actions taken by, the stockholders, the Board of Directors, and committees
of the Board of Directors of Dialog, and no meeting of the stockholders,
members, the Board of Directors or any committee of the Board of Directors has
been held for which minutes have not been prepared and are not contained in such
minute books.
(d) All accounts receivable of Dialog that are reflected on the
February 17, 2000 Balance Sheets or the accounting records of Dialog as of the
Closing Date (collectively, the "ACCOUNTS RECEIVABLE") represent or will
represent valid obligations arising from sales actually made or services
actually performed by Dialog in the ordinary course of business. Unless paid
prior to the Closing Date, except as set forth on SCHEDULE 2.8(D), the Accounts
Receivable are or will be as of the Closing Date current and collectible net of
the respective reserves shown on the Balance Sheet (in the case of Accounts
Receivable existing as of _________) or on the accounting records (in the case
of Accounts Receivable arising after _______) of Dialog as of the Closing Date
(which reserves are adequate). Except as set forth on SCHEDULE 2.8(D), there is
no contest, claim, or right of set-off, other than returns in the ordinary
course of business, under any Contract (as hereinafter defined) with any obligor
of an Accounts Receivable relating to the amount or validity of such Accounts
Receivable. SCHEDULE 2.8(D) contains a true, correct and complete list of all
Accounts Receivable as of February 17, 2000, which list sets forth the aging of
such Accounts Receivable.
2.9 TAXES. (a) Dialog, its predecessor entity Dialog Medical LLC
(f/k/a GOC Partners LLC), and any consolidated, combined, or unitary group of
which it is or was a member, as the cases may be (individually, a "TAX
AFFILIATE" and collectively the "TAX
<PAGE>
AFFILIATES", has (i) prepared and timely filed all returns, declarations,
reports, estimates, information returns and statements ("RETURNS") required to
have been filed or sent by or with respect to them to date in respect of any
Taxes (as hereinafter defined), and all such Returns are correct and complete;
(ii) timely and properly paid all Taxes that are shown as due and payable on
such Returns; and (iii) complied with all applicable laws, rules, and
regulations relating to the payment and withholding of Taxes and timely and
properly withheld from employee wages and paid over to the proper Governmental
Entity all amounts required to be so withheld and paid over under all applicable
laws.
(b) (i) There are no Liens for Taxes upon the assets of Dialog or any Tax
Affiliate except Liens for Taxes not yet due; (ii) neither Dialog nor any of its
Tax Affiliates has requested any extension of time within which to file any
Return which Return has not since been filed; (iii) no deficiency for any Taxes
has been proposed, asserted, or assessed against Dialog or any of its Tax
Affiliates which has not been resolved and paid in full; (iv) there are no
outstanding waivers or consents given by Dialog or any of its Tax Affiliates
regarding the application of the statute of limitations with respect to any
Taxes or Returns; and (v) no federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Returns.
(c) Neither Dialog nor any of its Tax Affiliates (i) has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by Dialog or any of its Tax
Affiliates; or (ii) is required to include in income any adjustment pursuant to
Section 481(a) of the Code by reason of a voluntary change in accounting method
initiated by Dialog or a Tax Affiliate or has any knowledge that the Internal
Revenue Service (the "IRS") has proposed any such adjustment or change in
accounting method. No property of Dialog or any of its Tax Affiliates is
property that Dialog, or any of its Tax Affiliates or any party to this
transaction is or will
<PAGE>
be required to treat as being owned by another Person pursuant to Section
168(f)(8) of the Code (prior to its amendment by the Tax Reform Act of 1986) or
its "tax-exempt use property" within the meaning of Section 168(h) of the Code.
(d) All transactions that could give rise to a substantial understatement
of federal income tax within the meaning of Section 6662 of the Code have been
adequately disclosed in accordance with Section 6662 of the Code. Neither Dialog
nor any of its Tax Affiliates is a party to any agreement, contract or
arrangement that would result, separately or in the aggregate, from this
Agreement, the consummation of the Merger or from any of the transactions
contemplated hereby, in the payment of any "excess parachute payments" within
the meaning of Section 280G of the Code.
(e) For purposes of this Agreement, "TAX" means any obligation or liability
(including any tax, withholding, fee or excise imposed by any Governmental
Entity, including any gross or net income, franchise, employment-related, real
or personal property, transfer, intangibles, documentary, gains, sales or use
tax) together with any and all interest, penalties and additions imposed with
respect thereto.
2.10 LEGAL PROCEEDINGS. Except as set forth on SCHEDULE 2.10, there
are no outstanding orders, judgments, injunctions, awards or decrees of any
court, arbitration tribunal or any Governmental Entity against or involving
Dialog or the Dialog Shareholders (in their capacity as such), or any of
Dialog's securities, assets or properties. There are no claims, suits, actions,
arbitrations, legal, administrative and other proceedings, or governmental
investigations (whether or not the defense thereof or liabilities in respect
thereof are covered by insurance) pending, or to the best knowledge of the
Dialog Parties, threatened against or involving Dialog or the Dialog
Shareholders (in their capacity as such), or any of Dialog's securities, assets
or properties.
<PAGE>
2.11 LABOR AND EMPLOYEE BENEFIT MATTERS.
(a) SCHEDULE 2.11 hereto contains a true, correct and complete list
of (i) each plan, program, policy, payroll practice, contract, agreement or
other arrangement providing for compensation, severance, termination pay,
performance awards, stock or stock-related awards, fringe benefits or other
employee pension or welfare benefits of any kind, whether formal or informal,
funded or unfunded, or written or oral, and whether or not legally binding,
which is now sponsored, maintained, contributed to or required to be contributed
to, by Dialog or pursuant to which Dialog has, or could reasonably be expected
to have, any liability, including, without limitation, any "employee benefit
plan" within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") (each a "BENEFIT PLAN"); and (ii)
each management, employment, bonus, option, equity (or equity related),
severance, consulting, non-compete, confidentiality or similar agreement or
contract currently in effect between Dialog and any current, former or retired
employee, officer, consultant, independent contractor, agent or partner of
Dialog (each an "BENEFIT AGREEMENT"). SCHEDULE 2.11 further attaches true,
correct and complete copies of each written document or agreement (or a written
description of any oral agreement or arrangement) relating to the matters set
forth in the preceding subsections (i) and (ii). Dialog does not currently
sponsor, maintain, contribute to, nor is it required to contribute to, nor has
Dialog or the Predecessor Entity ever sponsored, maintained, contributed to or
been required to contribute to, or incurred any liability with respect to, (i)
any "defined benefit plan" (as defined in ERISA Section 3(35)), (ii) any
"multiemployer plan" (as defined in ERISA Section 3(37)) or any plan that has
two or more contributing sponsors at least two of whom are not under common
control (within the meaning of Section 4063 of ERISA), (iii) any plan that is,
is intended to be, or has ever been treated, as a "qualified plan" (within the
meaning of Section 401(a) of the Code), (iv) any plan that is, is intended to
be, or has ever been treated as, a plan subject to Title IV of ERISA, or (v)
<PAGE>
any Benefit Plan or Benefit Agreement which provides, or has, or imposes on
Dialog, any liability to provide, life insurance, medical, severance or other
welfare benefits to any current or former employee of Dialog or former employee
of the Predecessor Entity (or spouse, dependent or beneficiary thereof) upon or
following such employee's or former employee's retirement or termination of
service with Dialog or the Predecessor Entity, except as required by Section
4980B of the Code or Part 6 of Title I of ERISA.
(b) Dialog is not and has never been (nor was the Predecessor Entity ever):
(i) a member of a "controlled group of companies," under "common control" or a
member of an "affiliated service group" within the meaning of Section 414(b),
(c) or (m) of the Code, (ii) required to be aggregated under Section 414(o) of
the Code, or (iii) under "common control," within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing sections, in each case with any other entity.
(c) Dialog has provided to Medscape and MAC accurate and complete copies of
all documents embodying or relating to each Benefit Plan and each Benefit
Agreement, including all amendments thereto, trust or funding agreements
relating thereto, the two most recent annual reports required under ERISA, if
any, the most recent determination letter received from the Internal Revenue
Service, if any, and the most recent summary plan description (with all material
modifications), as applicable, for each such plan or agreement.
(d) All contributions required to be made as of the Effective Time to or
with respect to any Benefit Plan or Benefit Agreement by applicable law or
regulation or by any plan document or other contractual undertaking, and all
premiums due or payable as of the Effective Time with respect to insurance
policies funding any Benefit Plan or Benefit Agreement have been timely made or
paid in full.
(e) Each Benefit Plan is currently, and has been at all times, maintained
in accordance with its terms and in compliance in all material respects with
<PAGE>
all applicable laws, statutes, orders, rules and regulations, including, without
limitation, ERISA and the Code. No material liability to any Governmental Entity
or other Person under any federal, state or local law, rule, regulation or
pronouncement has been or is expected to be incurred by Dialog with respect to
any Benefit Plan or Benefit Agreement or with respect to any benefit or
compensation plan, program or arrangement heretofore maintained, sponsored or
contributed to by the Predecessor Entity. There is not now, nor to the Dialog
Parties' knowledge, do any circumstances exist that could reasonably be expected
to give rise to, any requirement for the posting of security with respect to a
Benefit Plan or Benefit Agreement or the imposition of any Lien on the assets of
Dialog under applicable law, including, without limitation, ERISA and the Code.
(f) Except as set forth on SCHEDULE 2.11, the execution of, and performance
of the transactions contemplated by, this Agreement will not (either alone or
upon the occurrence of any additional or subsequent events directly related to
the transactions contemplated by this Agreement) constitute an event under any
Benefit Plan or Benefit Agreement that will or may result in any payment,
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligations to fund benefits with respect to any current or former
employee of Dialog or the Predecessor Entity (or any spouse, dependent or
beneficiary thereof).
(g) Except as set forth on SCHEDULE 2.11, (i) Dialog is not delinquent in
payments to any of its employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed by the date hereof or
amounts required to be reimbursed by them to the date hereof, (ii) Dialog is in
material compliance with all applicable federal, state and local laws, rules and
regulations respecting employment, employment practices, labor, terms and
conditions of employment and wages and hours, (iii) Dialog is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied,
<PAGE>
commitment or arrangement with any labor union, and no labor union has requested
or has sought to represent any of the employees, representatives or agents of
Dialog, (iv) there is no labor strike, dispute, slowdown or stoppage actually
pending, or, to the knowledge of the Dialog Parties, threatened, against or
involving Dialog, and (v) to the knowledge of the Dialog Parties, no salaried
key employee has any plans to terminate his or her employment with Dialog.
(h) For purposes of this SECTION 2.11, the term "employee" shall be
considered to include individuals rendering, or in the case of a "former
employee," individuals who rendered, services to Dialog or the Predecessor
Entity as independent contractors.
(i) SCHEDULE 2.11 contains a true, correct and complete list of the
name of each individual who is employed by Dialog on the date hereof along with
his or her current job title, base compensation, eligibility for bonus
compensation or any other compensation, date of hire, last date and amount of
increase in compensation, any employee benefit which is not generally available
to employees of Dialog and employment address. SCHEDULE 2.11 contains a true,
correct and complete list of persons currently rendering services to Dialog, or
who have rendered services to Dialog since the formation of the Predecessor
Entity for which Dialog is or has been obligated to issue a Form 1099, as
consultants or independent contractors, along with information regarding
compensation and reimbursement levels for each such person during all such
periods, and each such person who was classified as a consultant or an
independent contractor was properly so classified under applicable laws and
regulations and no federal, state or local taxes should have been withheld from
any payment made to any such person which were not withheld.
(j) Except as set forth on SCHEDULE 2.11, with respect to each Benefit
Plan or Benefit Agreement, there have been no "prohibited transactions" (within
the meaning of Section 406 of ERISA and Section 4975 of the Code) and no
fiduciary with
<PAGE>
respect to any Benefit Plan or Benefit Agreement has incurred, or to the Dialog
Parties' knowledge can reasonably be expected to incur, liability for a breach
of fiduciary duty or other failure to act or comply in connection with the
administration or investment of the assets of any Benefit Plan or Benefit
Agreement. Further, no action, suit, proceeding, or hearing, or to the Dialog
Parties' knowledge, investigation with respect to any Benefit Plan or Benefit
Agreement is pending or, to the knowledge of the Dialog Parties, threatened.
None of the directors, officers or employees of Dialog has, nor does any Dialog
Party have, any knowledge of any existing circumstances that could reasonably be
expected to give rise to any action, suit, proceeding, hearing, or investigation
involving a Benefit Plan or Benefit Agreement.
2.12 COMPLIANCE WITH LAWS. (a) Dialog and the conduct of the Business
is in compliance in all material respects with (i) all statutes, laws,
regulations, ordinances, rules, licenses, judgments, orders or decrees
applicable thereto (including regulations promulgated by or under the Food and
Drug Administration (FDA), the Health Care Finance Administration (HCFA) or the
Health Insurance Portability and Accountability Act of 1996 (HIPAA)), including
compliance with any government contractor affirmative action plan, if
applicable, and (ii) the Certificate of Incorporation and Bylaws of Dialog.
Dialog has not received notice of any alleged violation of any statute, law,
regulation, ordinance, rule, judgment, order, decree or license applicable
thereto or to its properties from any Person and neither Dialog nor any Dialog
Shareholder has any knowledge of any such violation.
(b) Dialog holds all licenses, permits, certificates, franchises,
orders or approvals of any Governmental Entity that are material to the conduct
of the Business and the uses of its assets (collectively "PERMITS") necessary to
operate the Business as presently conducted. SCHEDULE 2.12 sets forth a true,
accurate and complete list of all such Permits as of the date hereof. Such
Permits are in full force and effect and the validity and effectiveness thereof
will not be affected by the transactions contemplated
<PAGE>
hereby. No violations are or have been recorded with any Governmental Entity in
respect of any Permit, no proceeding is pending, or to the best knowledge of the
Dialog Parties, threatened to revoke or limit any Permit, and the Dialog Parties
know of no grounds for any such revocation or limitation.
2.13 INSURANCE. Dialog maintains insurance policies with insurers, in
such amounts and against such risks of Dialog as are customary and reasonable
for the Business and its assets. Dialog is included as an insured party under
such policies, with full rights as a loss payee (provided that certain policies
designate certain Persons as additional insureds). Attached hereto as SCHEDULE
2.13 are true, correct and complete copies of all policies of liability, theft,
fire, title, workers' compensation and other forms of insurance and surety bonds
insuring Dialog or the employees, properties, assets and Business of Dialog,
together with a list and brief description of the foregoing. All policies listed
in SCHEDULE 2.13 are in full force and effect; no such policy or the future
proceeds thereof has been assigned to any other Person; and all premiums and
other payments due under or on account of any such policy have been paid except
where the failure to make such payment would not result in the termination of
any such policy. There are no outstanding unpaid claims under any such policy.
Dialog has not received notice of cancellation or non-renewal of, or any
material amendment to, or any material increase in deductibles or premiums
under, any such policy.
2.14 CONTRACTS. Except as set forth on SCHEDULE 2.14, Dialog is not a
party to or bound by any written or oral (a) employment or consulting agreement;
(b) joint venture or partnership contract or agreement; (c) contract or
agreement restricting the right of Dialog to compete with any other Person; (d)
any loan agreement, indenture, promissory note or conditional sales agreement or
any pledge, security agreement, deed of trust, financing statement or any other
document granting or evidencing a Lien on any assets of Dialog; (e) any
guarantee, assumption of an obligation for borrowed money or purchase money
indebtedness or other obligation of reimbursement of any
<PAGE>
maker of a letter of credit; (f) contract, agreement or commitment providing for
the purchase or sale of assets outside the ordinary course of business; (g)
agreement, contract or commitment relating to capital expenditures in excess of
$5,000.00 in any single case or $25,000.00in the aggregate; (h) licenses,
whether as licensor or licensee, of any material invention (whether patented or
not), trade secret, know-how, copyright, trademark, service mark, trade name,
domain name, or other intellectual property, except for pre-packaged software;
(i) lease or sublease of, or option relating to, real estate; (j) lease as
lessee or lessor of personal property; (k) capitalized lease or sale-leaseback;
(l) data licensing, distribution, supply or development agreement or any
agreement related to a website or services, commerce, hosting, or data exchange,
delivery or distribution via the Internet; (m) royalty agreement; (n) any
revocable or irrevocable power of attorney; (o) software agreement, except for
pre-packaged software; (p) promotional agreement; (q) other contract or
agreement entered into other than in the ordinary course of business; or (r)
other contract or agreement providing for payments to or from Dialog in excess
of $25,000 in the aggregate or requiring one year or longer to perform. All of
the foregoing types of contracts and agreements are hereinafter referred to as
"CONTRACTS." Except as set forth thereon, each Contract set forth on SCHEDULE
2.14 is in full force and effect and, to the knowledge of the Dialog Parties is
legal, valid and binding and enforceable against each other Person that is a
party thereto. Except as set forth on SCHEDULE 2.14, Dialog is not nor, to the
knowledge of the Dialog Parties, is any other party to any such Contract, in
material breach thereof or default thereunder and there does not exist under any
provision thereof any event that, with the giving of notice or the lapse of time
or both, would constitute such a material breach or default by Dialog or, to the
knowledge of the Dialog Parties, by any other party to any such Contract. Except
as set forth on SCHEDULE 2.14, the Dialog Shareholders' Representative has
delivered or made available to Medscape and MAC
<PAGE>
true, correct and complete copies of each of such written Contracts or provided
summaries of any such oral Contracts.
2.15 AFFILIATE TRANSACTIONS. Except as disclosed in SCHEDULE 2.15, (a)
neither any Dialog Shareholder (or any of their respective Affiliates (as
defined below)), nor any officer or director of Dialog has provided or caused to
be provided, and does not currently provide or cause to be provided, to Dialog
any assets, services (other than as an employee or partner) or facilities or has
made any payments to or on behalf of Dialog, and (b) Dialog has not provided or
caused to be provided, and does not currently provide or cause to be provided,
to any Dialog Shareholder (or any of their Affiliates) or to any of Dialog's
Affiliates any assets, services or facilities or has made any payment (other
than member distributions, salary, bonus or business expense reimbursement
payments made to a Dialog Shareholder in the ordinary course of business) to or
on behalf of any Dialog Shareholder or any of Dialog's Affiliates or any of
Dialogue Shareholder's Affiliates. An "AFFILIATE" of any Person means any other
Person directly or indirectly controlling, controlled by or under common control
with such Person and shall include any officer, director, member, partner or
other equity holder of any such entity and the spouse or any issue of a natural
person or any trust for their benefit.
2.16 ENVIRONMENTAL COMPLIANCE.
(a) For purposes of this Agreement: (i) "HAZARDOUS SUBSTANCE" means any
pollutant, contaminant, hazardous substance or waste, solid waste, radioactive
material, pesticide, petroleum or any fraction thereof, asbestos, lead,
formaldehyde, or any other chemical, substance or material listed or identified
as a hazardous substance in or regulated by any Environmental Law; (ii)
"ENVIRONMENTAL LAW" means any federal, state, local or other governmental
statute, regulation, law or ordinance, rule or standard, or any rule of common
law dealing with or relating to the protection of human health, safety or
comfort (including noise), the use or preservation of natural resources or the
<PAGE>
pollution, protection or restoration of the environment; (iii) "REAL PROPERTY",
for purposes of this Section 2.16, means all real property (including installed
equipment, fixtures, piping, drains, sewers, tanks, improvements and
appurtenances thereto) presently or formerly owned absolutely, owned in fee,
leased (including easements and rights of way), or otherwise occupied by Dialog;
and (iv) "ENVIRONMENTAL LOSSES" means any and all damages, losses, expenses,
costs (including reasonable attorneys' fees, court costs and interest paid or
accrued), penalties, Liens, interest, fines, assessments, charges and
liabilities of any kind imposed or incurred by, under, because of or pursuant to
Environmental Laws, whether based in negligence, strict liability, contract or
otherwise, under any theory or process of recovery or relief, at law or in
equity, including, without limitation, those related to remediation, removal,
response, restoration, mitigation, abatement, investigation, testing,
monitoring, personal injury, death and property damage.
(b) Except as set forth on SCHEDULE 2.16, there are no claims pending
or, to the knowledge of the Dialog Parties, threatened and neither Dialog nor
any Dialog Shareholder has received written notice, alleging that Dialog or any
of the Real Property is, has been or may be in violation of or non-compliance
with any Environmental Law or relating to any Environmental Losses.
(c) To the knowledge of the Dialog Parties, no Hazardous Substances
have ever been disposed of, buried, spilled, leaked, discharged, emitted or
released at levels requiring investigation, study, removal or remediation under,
or which form or may form the basis of a claim pursuant to, any Environmental
Law, in, on, from, adjacent to or under the Real Property.
(d) To the knowledge of the Dialog Parties, no Hazardous Substances
have been sent, transported or otherwise conveyed by or on behalf or at the
direction of Dialog from any of the Real Property to any other location from
which there is or may be a release or threatened release of Hazardous Substances
for which Dialog has been
<PAGE>
notified that it has or may have liability or responsibility for cleanup costs
or injury or damages, whether as a potentially responsible party or otherwise.
(e) The Real Property is not being used and, to the knowledge of the
Dialog Parties, never has been used in connection with the manufacturing,
generating, treating, storing or transporting of any Hazardous Substances in
quantities regulated under any Environmental Law, and, to the knowledge of the
Dialog Parties, no Hazardous Substances have been treated, accumulated, stored
or disposed of there.
(f) To the knowledge of the Dialog Parties, there are not now and never
have been any underground or above ground storage tanks, or any sumps, ponds,
pits, lagoons, impoundments or other containment facilities of any kind on, at,
under or adjacent to the Real Property which contain or ever did contain any
Hazardous Substances.
(g) SCHEDULE 2.16 identifies and the Dialog Shareholders'
Representative has provided or made available to Medscape and MAC true, correct
and complete copies of all environmental audits or assessments relating in whole
or in part to Dialog, or the Business undertaken by or on behalf of Dialog or,
if such audits or assessments are in the possession of Dialog or any Dialog
Shareholder, undertaken by or on behalf of any Governmental Entity and written
communications relating in whole or in part to Dialog, or the Business, with any
Governmental Entity, in each case within the past six years, which describe the
environmental compliance or liability status of any Real Property or the
compliance or noncompliance of the operation of the Real Property or of the
conduct of the Business with respect to any Environmental Law.
(h) Except as set forth on SCHEDULE 2.16, Dialog operates and, to the
knowledge of the Dialog Parties, at all times has operated, and to the knowledge
of the Dialog Parties, the Real Property is and, has been constructed and
operated, in substantial compliance with all applicable Environmental Laws.
<PAGE>
(i) SCHEDULE 2.16 contains a true, correct and complete listing of all
material Permits and other authorizations issued under or pursuant to the
authority of any Environmental Law. Except to the extent, if any, set forth on
SCHEDULE 2.16, all Permits and other authorizations presently required pursuant
to any applicable Environmental Law for the lawful operation of the Business are
in the possession of Dialog and are duly issued and in full force and effect. To
the knowledge of the Dialog Parties, there is not any threat that any such
permit, license or other authorization will be withdrawn, terminated, limited or
materially changed pursuant to any Environmental Law.
2.17 PROPERTIES. (a) REAL PROPERTY. Dialog does not own, nor has it
ever owned, any real property or any buildings or other structures and does not
have any options or any contractual obligations to purchase or acquire any
interest in real property, except as disclosed on SCHEDULE 2.17. SCHEDULE 2.17
sets forth a true, correct and complete list of all leases of real property to
which Dialog is a party (collectively, the "LEASES"). True, correct and complete
copies of all leases and all amendments, modifications and supplemental
agreements thereto have been delivered to Medscape and to MAC by Dialog. The
Leases are in full force and effect and to the best knowledge of the Dialog
Parties are binding and enforceable against each of the parties thereto in
accordance with their respective terms. To the best knowledge of the Dialog
Parties, no party to any Lease has given notice to any other party thereto
claiming the existence or occurrence of a breach or a default thereunder and
there has not occurred any event or circumstance which constitutes, or with the
passages of time or the giving of notice, would constitute, a breach or a
default thereunder.
(b) TANGIBLE PERSONAL PROPERTY. Dialog has good and marketable title
to, free and clear of all Liens, or otherwise has the unrestricted right to use,
each item of equipment, furniture, leasehold improvements, fixtures, vehicles,
structures, any related capitalized items and other tangible personal property
material to the Business
<PAGE>
("TANGIBLE PERSONAL PROPERTY"). Each item of Tangible Personal Property is in
good and sufficient operating condition and repair (excepting ordinary wear and
tear), is adequate for the use to which it is being put, and is not in need of
maintenance or repairs, except for ordinary routine maintenance and repairs for
which Dialog is not obligated to pay or that are not material in cost or nature.
To the best knowledge of the Dialog Parties, Dialog has not received notice that
any of its Tangible Property is in violation of any existing law or any
building, zoning, health, safety or other ordinance, code or regulation. The
Tangible Personal Property described above comprise all of the assets which are
necessary or appropriate for the conduct of the Business as currently conducted.
(c) TITLE. Dialog owns outright and has good title to all of its
material assets and properties, including, all of the assets and properties
reflected on the February 17, 2000 Balance Sheet, free and clear of all Liens,
except for (i) assets and properties disposed of in the ordinary course of
business, (ii) Liens securing the claims of materialmen, carriers, landlords and
like Persons, all of which are not yet due and payable, (iii) Liens for Taxes
not yet due and payable or for Taxes being contested in good faith by
appropriate proceedings, or (iv) Liens reflected on the February 17, 2000
Balance Sheet.
2.18 INFORMATION TECHNOLOGY. SCHEDULE 2.18 sets forth a list and brief
description of all computer hardware, software and networks used by Dialog and
identifies which are owned by Dialog directly and which are licensed to Dialog
for use.
2.19 DATA; DATABASES. Except as set forth on SCHEDULE 2.19 Dialog has
the unrestricted right to use all software associated with its databases. Except
as set forth in SCHEDULE 2.19, Dialog has the unrestricted right to use all of
the data which comprise all of its databases including data taken directly from
any and all external sources as well as derived data.
<PAGE>
2.20 INTELLECTUAL PROPERTY.
(a) SCHEDULE 2.20 sets forth a true, correct and complete list or
description of all trademarks, trademark registrations, service marks, service
mark registrations, trade names, company names, patents, design patents,
copyrights, domain names and all registrations and pending applications for the
foregoing, in each case which are used in or required for the Business as
currently being conducted (collectively, the "INTELLECTUAL PROPERTY RIGHTS").
Except as disclosed on SCHEDULE 2.20, Dialog is the sole and exclusive owner of,
with all right, title and interest in and to (free and clear of any Lien) the
Intellectual Property Rights described on SCHEDULE 2.20 and has sole and
exclusive rights, without being contractually obligated to pay any compensation
to any Person, to the use thereof or the material covered thereby in connection
with the services or products in respect of which they are being used as of the
date of this Agreement or as otherwise stated in the description of goods and
services contained in the relevant materials relating to any Intellectual
Property Rights filed with the United States Copyright Office or the United
States Patent and Trademark Office. Except as set forth on SCHEDULE 2.20, Dialog
has not granted any licenses or other rights to the Intellectual Property Rights
to any other Person and no other Person has granted to Dialog any licenses or
other rights to the Intellectual Property Rights. Each such license granted to
Dialog is valid and binding on Dialog, and to the knowledge of the Dialog
Parties, the other parties thereto, and the intellectual property used by Dialog
pursuant to such license will be available to the Surviving Entity on terms and
conditions after the Closing which are identical to the terms and conditions in
force prior to the Closing. Except as set forth on SCHEDULE 2.20, there are no
interferences, oppositions, cancellations or other contested proceedings
pending, or to the knowledge of the Dialog Parties threatened, in the United
States Copyright Office, the United States Patent and Trademark Office or any
Federal, state or local court or before any Governmental Entity, relating to any
registration, grant, license or pending
<PAGE>
application with respect to any Intellectual Property Rights and none of
the Dialog Parties have any knowledge of any facts that could reasonably be
expected to give rise to any such interferences, oppositions, cancellations or
other contested proceeding.
(b) Except as set forth on SCHEDULE 2.20, (i) Dialog has not been sued
or charged or been a defendant in any claim, suit, action or proceeding which
involves a claim of infringement of any Intellectual Property Rights, (ii) to
the knowledge of the Dialog Parties, there are no other claims that Dialog is
infringing any existing patent, trademark or copyright or any basis for any such
claim, without regard to whether any such patent, trademark or copyright is
ultimately found to be valid, (iii) to the knowledge of the Dialog Parties,
there are no continuing infringements by any other Person of the Intellectual
Property Rights and (iv) to the knowledge of the Dialog Parties, the use of the
Intellectual Property Rights in connection with the Business, as currently being
conducted, does not infringe the patent, trademark, copyright or any other right
of any Person.
2.21 BANK ACCOUNTS. SCHEDULE 2.21 sets forth a true, correct and
complete list of each bank at which Dialog has an account or safe deposit box
and the address of each such bank, the number of such account or box and the
name of each individual authorized to draw on or have access thereto.
2.22 ABSENCE OF CERTAIN CHANGES. Since December 22, 1999, except as set
forth on SCHEDULE 2.22, Dialog has conducted the Business in the ordinary course
and maintained its records and books of account in reasonable detail which
accurately and fairly reflect the transactions of Dialog in all material
respects. Since December 22, 1999 there has not been, except as disclosed on
SCHEDULE 2.22:
(a) any materially adverse change in the nature of the Business, the results of
Dialog's operations, Dialog's assets, Dialog's financial condition, or the
manner of conducting the Business;
<PAGE>
(b) any damage, destruction or casualty loss (whether or not covered by
insurance) adversely affecting the Business, the results of operations, the
assets or the financial condition of Dialog or its ability to carry on its
operations substantially as presently conducted and as proposed to be
conducted;
(c) any declaration, setting aside or payment of distributions in respect of
the Dialog Stock; (d) any entering into of any employment agreement, or any
increase in the compensation payable, or to become payable, by Dialog to
any of its officers or partners, employees or agents over the rates payable
as of December 22, 1999;
(e) any issuance of securities of Dialog, including options, warrants or other
agreements evidencing or requiring such issuance;
(f) any amendment or termination of, default by Dialog or, to the knowledge of
any Dialog Party, default by any other party under, any contract, agreement
or license to which Dialog is a party and which materially adversely
affects Dialog;
(g) any labor dispute or collective labor negotiation involving Dialog;
(h) any discharge or satisfaction of any Lien, obligation or liability
(accrued, absolute, fixed or contingent) of Dialog except in the ordinary
course of business;
(i) incurrence by Dialog of any obligation or liability (accrued, absolute,
fixed or contingent) except current liabilities incurred, and obligations
entered into, in the ordinary course of business and consistent with prior
practice (for purposes of this Agreement, Medscape, MAC and the Dialog
Parties agree that the incurrence of any debt other than normal trade
credit shall not be in the ordinary course of business);
(j) institution of any severance, retirement, bonus, equity option, profit
sharing pension plan or similar agreement or changes made in any such
existing plans of Dialog, other than severance or bonus arrangements with
employees of Dialog
<PAGE>
entered into in the ordinary course of business consistent with past
practices or as otherwise specifically contemplated hereby;
(k) any capital expenditure involving an amount of more than Five Thousand
Dollars ($5,000) in any one instance or an aggregate of more than Ten
Thousand Dollars ($10,000);
(l) announcement or initiation of any general increase in compensation, bonus,
insurance or employee benefits involving employees of Dialog;
(m) sale or disposition (other than inventory in the ordinary course of
business), or lease of any property of Dialog or mortgage, pledge, or grant
or imposition of any Lien on any asset or property of Dialog;
(n) cancellation or waiver of any claims or rights with a value in excess of
Twenty-Six Thousand Dollars ($26,000);
(o) any amendment to the Certificate of Incorporation or Bylaws of Dialog; or
(p) any agreement to effect any of the foregoing.
2.23 RELATIONSHIP WITH ADVERTISERS, SUPPLIERS AND CUSTOMERS. SCHEDULE
2.23 sets forth a true, correct and complete list of each customer of Dialog
which represented in excess of five (5%) percent of Dialog's revenues in any of
the fiscal years ended December 31, 1997 or December 31, 1998 or which in the
good faith judgment of the Dialog Parties is expected to account for in excess
of five (5%) percent of Dialog's revenues in the fiscal year ended December 31,
1999, and identifies any such customer which has terminated its relationship
with Dialog or significantly reduced the volume of business conducted by it with
Dialog since January 1, 2000. Except as described in SCHEDULE 2.23, the Dialog
Parties have no actual knowledge that any significant supplier of goods,
products or services to Dialog, or any significant customer of Dialog, (i) has
made any material complaint or objection with respect to the service or any
business practices of Dialog or the transactions contemplated hereby or (ii)
will cease to do business, or significantly reduce the business conducted, with
the Surviving
<PAGE>
Corporation with respect to the Business after or as a result of the
consummation of any transactions contemplated hereby.
2.24 PHYSICIANS' CONTRACTS. Attached hereto as SCHEDULE 2.24 are true,
accurate and complete copies of each contract, agreement or arrangement between
Dialog and any physician, pursuant to which Dialog has incurred an obligation to
pay fees, commissions, or any other amounts ("PHYSICIANS' CONTRACTS"). As of the
Closing, all such Physicians' Contracts will have expired or been duly
terminated in accordance with their respective terms and any and all liabilities
of Dialog thereunder or in connection therewith shall have been fully paid or
discharged in full within thirty (30) days of the Closing. Except as disclosed
in SCHEDULE 2.24, Dialog has not incurred any liability to pay any amount in
excess of payments expressly provided for under each such Physician's Contract,
including any fee or other amount for or in consideration of early termination
of such Physician's Contract.
2.25 UNDISCLOSED LIABILITIES. Except (a) as disclosed in SCHEDULE 2.25
or the other Schedules hereto, (b) as and to the extent disclosed or reserved
against on the February 17, 2000Balance Sheet, (c) as incurred after December
22, 1999 in the ordinary course of business consistent with prior practice and
not prohibited by this Agreement, or (d) as incurred in connection with this
Agreement or any of the transactions contemplated hereby, Dialog does not have
any material liabilities or obligations of any nature, absolute, accrued,
contingent or otherwise and whether due or to become due required by GAAP to be
set forth on the February 17, 2000 Balance Sheet.
2.26 FINDER'S FEES. There is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Dialog or any Dialog Shareholder other than Rob Shuler who would have a claim
to any fee or commission from Dialog or any Dialog Shareholder, Medscape, MAC or
the Surviving Corporation or any of their respective Affiliates in connection
with the transactions
<PAGE>
contemplated by this Agreement, and no Dialog Party has incurred any obligation
to pay a brokerage, finder's fee or commission to any Person, other than Rob
Shuler, the fees and expenses of whom shall be borne by Dialog.
2.27 NO MATERIAL OMISSIONS. Neither this Agreement (including the
Schedules hereto) nor any certificate delivered pursuant hereto contains any
untrue statement of a material fact relating to any Dialog Shareholder or Dialog
or omits to state a material fact relating to any Dialog Shareholder or Dialog
necessary to make the statements made, in light of the circumstances in which
they are made, not misleading. In each case where a representation and warranty
is made "to the knowledge" of Dialog, the Dialog Parties or any Dialog
Shareholder, each of Dialog, the Dialog Parties, or the Dialog Shareholders, as
applicable, has made inquiry of the responsible officer, employee or agent of
Dialog whose responsibilities with Dialog would include those matters which are
the subject of the representation and warranty.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MEDSCAPE
Medscape represents and warrants to the Dialog Shareholders as follows:
3.1 ORGANIZATION; STANDING AND POWER; BUSINESS OF MEDSCAPE. Medscape is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, with all requisite corporate power and authority
and all governmental licenses, authorizations, consents and approvals required
to own its properties and to conduct its business as presently conducted and as
presently proposed to be conducted. Medscape has delivered to the Dialog
Shareholders' Representative true, correct and complete copies of the
Certificate of Incorporation and the Bylaws of Medscape.
3.2 NO CONFLICTS. The execution, delivery and performance by Medscape
of this Agreement, the consummation of the transactions contemplated hereby and
compliance by Medscape with the terms hereof will not (a) violate, conflict
<PAGE>
with, cause an event of default under, give rise to a right of termination,
cancellation or acceleration of any right or obligation of Medscape under, or
result in the creation or imposition of any Lien on any asset of Medscape or on
the securities of Medscape under any agreement, instrument, License, franchise,
judgment, order, law, rule or regulation by which Medscape is bound or to which
Medscape's property is subject, nor (b) violate or conflict with the Articles of
Incorporation or Bylaws of Medscape.
3.3 CAPITALIZATION. The capitalization of Medscape is as disclosed in
its public filings with the Securities and Exchange Commission . Except for the
obligations set forth in this Agreement or as set forth on SCHEDULE 3.3, (i) no
subscription, warrant, option, preemptive rights, convertible security or other
right (contingent or otherwise) to purchase or acquire any shares of capital
stock or other security of Medscape issued by Medscape is authorized or
outstanding, (ii) there is no commitment or offer by Medscape to issue or
provide any such subscription, warrant, option, preemptive right, convertible
security or other right or to issue or distribute to holders of any shares of
its capital stock any evidences of indebtedness or assets of Medscape, (iii)
Medscape has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any shares of its capital stock or any interest therein or to
pay any dividend or make any other distribution in respect thereof, (iv) there
are no restrictions on the transfer of Medscape's capital stock other than those
arising from securities laws, and (v) there are no voting trusts, proxies or
other agreements, instruments or understandings with respect to outstanding
shares of Medscape's capital stock to which Medscape is a party.
3.4 DUE AUTHORIZATION AND ISSUANCE OF THE SHARES. Upon issuance in
accordance with the terms hereof, the Medscape Shares constituting the Merger
Consideration, will be duly authorized, validly issued, fully paid,
non-assessable and will have been issued in compliance with all charter
documents of Medscape and all applicable federal and state laws.
<PAGE>
3.5 BINDING EFFECT. Medscape has all requisite power and authority to
execute this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by Medscape. The execution
and delivery of this Agreement by Medscape and the consummation of the
transactions contemplated hereby by Medscape do not and will not require the
approval of any Person. Assuming the due execution and delivery of this
Agreement by MAC and the Dialog Parties, this Agreement constitutes a valid and
binding obligation of Medscape, enforceable against Medscape in accordance with
its terms.
3.6 SEC REPORTS; FINANCIAL STATEMENTS; BOOKS AND RECORDS; (a) Medscape
has previously delivered to Dialog Form 10-Q, as filed with the Securities and
Exchange Commission ("SEC"), and all other reports filed by Medscape with the
SEC under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")
since November 14, 1999. As of their respective dates, such reports complied in
all material respects with applicable SEC requirements and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Medscape has timely
filed with the SEC all reports required to be filed under Sections 13, 14 or
15(d) of the Exchange Act since becoming registered under the Exchange Act.
(b) The consolidated financial statements contained in the Medscape
quarterly report on Form 10-Q for the quarter ended September 30,, 1999 (the
"MEDSCAPE 10-Q") have been prepared from, and are in accordance with, the books
and records of Medscape and fairly present the consolidated financial condition,
results of operations and cash flows of Medscape as of the dates and for the
periods presented therein, all in accordance with GAAP applied on a consistent
basis, except as otherwise indicated therein and subject (in the case of
unaudited financial statements included in
<PAGE>
the Medscape 10-Q) to normal year-end and audit adjustments and footnote
disclosures which in the aggregate are not material.
3.7 ABSENCE OF CERTAIN CHANGES. Since the Medcsape 10-Q, except as set
forth on SCHEDULE 3.7, Medscape has conducted its business in the ordinary
course and maintained its records and books of account in reasonable detail
which accurately and fairly reflect the transactions of Medscape in all material
respects. Since the Form 10-Qthere has not been, except as disclosed on SCHEDULE
3.7:
(a) any materially adverse change in the nature of the Medscape's business, the
results of Medscape's operations, Medscape's assets, Medscape's financial
condition, or the manner of conducting its business;
(b) any damage, destruction or casualty loss (whether or not covered by
insurance) adversely affecting the Medscape's business, the results of
operations, the assets or the financial condition of Medscape or its
ability to carry on its operations substantially as presently conducted and
as proposed to be conducted; or
(c) Any declaration, setting aside or payment of distributions in respect of
any capital stock.
ARTICLE IV
MAC represents and warrants to the Dialog Shareholders as follows:
4.1 ORGANIZATION; STANDING AND POWER; BUSINESS OF MAC. MAC is a newly
formed Delaware corporation and a direct, wholly owned subsidiary of Medscape
which was formed solely for the purpose of consummating the transactions
contemplated hereby. MAC is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. MAC has delivered to
the Sellers' Representative true, correct and complete copies of the Certificate
of Incorporation and the Bylaws of MAC.
<PAGE>
4.2 NO CONFLICTS. The execution, delivery and performance by MAC of
this Agreement, the consummation of the transactions contemplated hereby and
compliance by MAC with the terms hereof will not (a) violate, conflict with,
cause an event of default under, give rise to a right of termination,
cancellation or acceleration of any right or obligation of MAC under, or result
in the creation or imposition of any Lien on any asset of MAC under any
agreement, instrument, Permit, franchise, judgment, order, law, rule or
regulation by which MAC is bound or to which MAC's property is subject, nor (b)
violate or conflict with the Articles of Incorporation or Bylaws of MAC.
4.3 CAPITALIZATION. All of the outstanding shares of MAC are owned by
Medscape.
4.4 BINDING EFFECT. MAC has all requisite power and authority to
execute this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by MAC. The execution and
delivery of this Agreement by MAC and the consummation of the transactions
contemplated hereby by MAC do not and will not require the approval of any
Person. Assuming the due execution and delivery of this Agreement by the Dialog
Parties and Medscape, this Agreement constitutes a valid and binding obligation
of MAC, enforceable against MAC in accordance with its terms.
ARTICLE V
COVENANTS AND AGREEMENTS
5.1 CONFIDENTIALITY OBLIGATIONS. The Dialog Parties, Medscape and MAC
will, and will cause Dialog's agents and employees to, hold in confidence,
unless compelled to disclose by judicial or administrative process, or in the
opinion of counsel, by other requirements of law, all Confidential Information
(as hereinafter defined) and will not disclose the same to any Person. If this
Agreement is terminated, (i) Medscape and MAC will promptly return to the Dialog
Parties or destroy all documents (including copies) containing or based upon
Confidential Information pertaining to Dialog, and (ii)
<PAGE>
the Dialog Parties will promptly return to Medscape or destroy all documents
(including copies) containing or based upon Confidential Information pertaining
to Medscape or MAC. For purposes hereof, "CONFIDENTIAL INFORMATION" shall mean
all information of any kind related to Dialog, Medscape or MAC, except
information (i) ascertainable or obtained from public or published information,
(ii) received from a third party not known to the receiving party to be under an
obligation to keep such information confidential, (iii) that is or becomes known
to the public (other than through a breach of this Agreement), (iv) that was in
the receiving party's possession before disclosure thereof to it in connection
with this Agreement, as established by written records, or (v) that was
independently developed by the receiving party without reference to Confidential
Information. In the event that any party or any of its Affiliates is notified
that he or it is or may become legally compelled to disclose any of the
Confidential Information, such party will provide the other parties with prompt
written notice of the existence, terms and circumstances surrounding such notice
so that the party affected by disclosure may, at its cost and expense, seek a
protective order or other appropriate remedy. In the event that such protective
order or other remedy is not obtained prior to the time disclosure is required,
the party required to make the disclosure will furnish only that portion of the
Confidential Information that they are advised in writing by counsel is legally
required to be furnished, and will furnish to the party affected by such
disclosure a copy of such written advice of counsel. The respective obligations
of Medscape and MAC under this Section 5.1 shall terminate on and as of the
Closing.
5.2 CONSUMMATION OF AGREEMENT. Subject to the terms and conditions
hereof, each party to this Agreement agrees to fully cooperate with the others
and the others' counsel, accountants and representatives in connection with any
steps required to be taken as part of its obligations under this Agreement. Each
party shall use all reasonable efforts consistent with reasonable business
practice to cause all conditions to its obligations and to the other parties
under this Agreement to be satisfied as
<PAGE>
promptly as possible, and will not undertake a course of action inconsistent
with this Agreement or which would make any of its representations, warranties,
agreements or covenants in this Agreement untrue in any material respect or any
conditions precedent to its obligations hereunder unable to be satisfied at or
prior to the Closing.
5.3 CONDUCT OF THE DIALOG BUSINESS. Except with the prior written
consent of MAC and Medscape and except as otherwise contemplated herein, during
the period from the date hereof to the Closing Date, Dialog and the Dialog
Shareholders shall observe the following covenants:
(a) AFFIRMATIVE COVENANTS Except as provided in this Agreement or any
Schedule herein, Dialog will, and the Dialog Shareholders shall cause Dialog to:
(i) PRESERVATION OF BUSINESS. Use all reasonable efforts to preserve intact
the Business and keep available the services of present employees, in
each case in accordance with past practice, and use all reasonable
efforts to advertise, promote and market Dialog's services and products,
keep Dialog's properties intact, preserve its good will and maintain all
physical properties in good operating condition;
(ii) INSURANCE. Use all reasonable efforts to keep in effect casualty,
liability, worker's compensation and other insurance policies in coverage
amounts not less than those in effect as of the date of this Agreement;
(iii) INTELLECTUAL PROPERTY RIGHTS. Use all reasonable efforts to preserve and
protect Dialog's Intellectual Property Rights;
(iv) NOTIFICATION. Promptly notify Medscape and MAC of (1) any emergency or
other material change in Dialog's condition (financial or otherwise),
business, operations, properties, assets, liabilities, prospects or (2)
of any litigation or governmental complaints, investigations or hearings
(or communications indicating that the same may be contemplated); and
<PAGE>
(iv) ORDINARY COURSE. Operate the Business diligently and solely in the
ordinary course.
(b) NEGATIVE COVENANTS Except as provided in this Agreement or any Schedule
herein, Dialog will not, and the Dialog Shareholders shall not nor cause Dialog
to:
(i) DISPOSITION OF ASSETS. Sell or transfer or mortgage, pledge or create or
permit to be created any Lien on any of Dialog's assets, or the Dialog
Stock, other than sales and transfers in the ordinary course of business
and Liens existing under arrangements disclosed herein or permitted
hereunder;
(ii) LIABILITIES. Without the consent of Medscape and MAC, (1) incur any
obligation or liability other than in the ordinary course of business,
(2) incur any indebtedness for borrowed money or enter into any contract
or commitment involving payments by Dialog of $5,000 or more, other than
purchase orders or commitments for inventory material and supplies in the
ordinary course of business;
(iii) COMPENSATION. Without the consent of Medscape and MAC, (1) change the
compensation, fringe benefits of any officer, director or employee, or
(2) enter into or modify any Benefit Plan or any employment, severance or
other agreement with any officer, director or employee of Dialog other
than changes required by law to maintain the tax-qualified status of any
Benefit Plan or as otherwise required by law;
(iv) CAPITAL STOCK. (1) Grant or accelerate the exercisability of, any option,
warrant or right to purchase, or to convert any obligation into, shares
of Dialog's capital stock, (2) declare or pay any dividend or other
distribution with respect to any shares of Dialog's capital stock, or (3)
issue any shares of Dialog's capital stock, except upon the exercise of
options outstanding on the date hereof or as contemplated in Schedules
delivered by or on behalf of Dialog pursuant hereto;
<PAGE>
(v) CHARTER AND BYLAWS. Amend the Articles of Incorporation or Bylaws of
Dialog;
(vi) ACQUISITIONS. Make any material acquisition of property other than in the
ordinary course of business; (vii) MATERIAL AGREEMENTS. Without the
consent of Medscape, enter into or modify any material agreement with any
other Person (other than agreements in the ordinary course of business
involving payments by Dialog of less than $5,000); or
(viii) BREACH OF REPRESENTATIONS. Take any other action that would make any
representation or warranty contained in Article II to be untrue or
incorrect.
5.4 CONTINUED EFFECTIVENESS OF REPRESENTATIONS AND WARRANTIES. From the
date hereof, up to and including the Closing Date, Dialog shall conduct, and the
Dialog Shareholders shall cause Dialogue to conduct, the Business and affairs of
Dialog in a manner such that the representations and warranties contained in
this Agreement shall be true and correct on and as of the Closing Date as if
made on and as of the Closing Date.
5.5 COVENANT NOT TO COMPETE. (a) Each of the Dialog Shareholders hereby
covenants and agrees, individually and for himself, that for a period of four
(4) years from the Closing Date, he shall not (except on behalf of Dialog, the
Surviving Corporation or an Affiliate of the Surviving Corporation, if employed
thereby), independently or in connection with any other Person, directly or
indirectly:
(1) participate, consult with or advise or engage in (as a principal,
employee or consultant), an online business operated over the World Wide
Web (the " TERRITORY"), in any Competitive Business (as hereinafter
defined); or
(2) establish, acquire or own any interest in any Competitive Business
established or conducting business in the Territory, PROVIDED, HOWEVER,
that nothing herein shall restrict any Dialog Shareholder from acquiring
(i) any interest in a registered investment company or (ii) a less than
1% interest in any public company listed on a national securities
exchange or admitted for trading on NASDAQ NMS; or
<PAGE>
(3) (A) solicit, recruit or hire any employees of Medscape or the Surviving
Corporation; and (B) solicit or encourage any employee of Medscape or the
Surviving Corporation to leave the employment thereof; or soliciting or
encouraging any of Medscape's or the Surviving Corporation's customers,
suppliers or others with whom it does business to cease doing business
with Medscape or the Surviving Corporation.
For purposes hereof, "COMPETITIVE BUSINESS" means the business of, or any
business engaged directly or indirectly in any line of business in which Dialog
is engaged as of the date of this Agreement.
(b) n this Section 5.5 are reasonable in scope and duration and are
necessary to protect, and to enable the Surviving Corporation (and any successor
thereto) as the owner of Business and assets of Dialog to receive the
anticipated benefits of, the goodwill of Dialog and its business. The parties
hereto agree that, if any of the length of time, the geographical area, the
scope or another parameter of the restrictions set forth above is deemed to be
unlawfully restrictive by a court of competent jurisdiction, such provision
shall be deemed to be amended and shall be construed by such court to have the
broadest type, scope and duration permissible under applicable law, and if no
validating construction is possible, shall be severable from the rest of this
Agreement, and the validity, legality or enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
(c) The parties recognize that the performance of the obligations
under this Section 5.5 by each of the Dialog Shareholders is special, unique and
extraordinary in character. In addition to such other rights and remedies as the
Surviving Corporation or Medscape may have at equity or in law with respect to
any breach of this Agreement, if any Dialog Shareholder commits a material
breach of any of the provisions of this
<PAGE>
Section 5.5, the Surviving Corporation or Medscape shall have the right and
remedy to seek to have such provisions specifically enforced by any court of
competent jurisdiction with respect to such Dialog Shareholder or to enjoin such
Dialog Shareholder from performing services for any Person, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Surviving Corporation, Medscape, Dialog and the
Business and that money damages will not provide an adequate remedy to the
Surviving Corporation and Medscape.
5.6 ACCESS TO INFORMATION. Prior to the Effective Time, each of
Medscape and MAC shall be entitled, through its employees and representatives,
to have such access to the assets, properties, business, books, records and
operations of Dialog as Medscape or MAC shall reasonably request in connection
with Medscape and MAC's investigation of Dialog with respect to the transactions
contemplated hereby. Any such investigation and examination shall be conducted
at reasonable times and the Dialog Parties shall cooperate fully therein. No
investigation by Medscape or MAC shall diminish or obviate any of the
representations, warranties, covenants or agreements made by any of the Dialog
Parties contained in this Agreement (or any of the Schedules hereto). In order
that Medscape and MAC shall have full opportunity to make such investigation,
the Dialog Parties shall furnish the representatives of Medscape and MAC during
such period with all such information and copies of such documents concerning
the business and affairs of Dialog as such representatives may reasonably
request and cause Dialog's officers, employees, consultants, agents, accountants
and attorneys to reasonably cooperate fully with such representatives in
connection with such investigation.
5.7 EXPENSES. If the Merger is not consummated, each of the parties
shall bear its or his respective expenses incurred in connection with this
Agreement and the transactions contemplated hereby. If the Merger is
consummated, (i) the Surviving Corporation, as the successor to Dialog, shall be
liable for all unpaid expenses of Dialog and
<PAGE>
(ii) the Dialog Shareholders shall each be liable for all of their
unpaid expenses (including their respective legal fees), which shall in no event
be charged to Dialog.
5.8 AUTHORIZATIONS. Prior to the Closing Date, the parties shall use
all reasonable efforts to obtain all authorizations, consents and permits
required to permit the consummation of the transactions contemplated hereby,
including all consents required from third parties who have contractual
relationships with Dialog.
5.9 FURTHER ASSURANCES. Each of the parties shall execute such
documents, further instruments of transfer an assignment and other papers and
take such further actions as may be reasonably required or desirable to carry
out the provisions hereof and the transactions contemplated hereby.
5.10 Requirements of Rule 144. Medscape covenants that until all of the
shares issued as Merger Consideration are sold by the Dialog Shareholders and
that Non-founding Dialog Shareholders that it will take all actions reasonably
necessary to permit the public sale pursuant to Rule 144 under the Securities
Act of 1933 including the filing with the SEC in a timely manner all reports and
other documents required of Medscape under the Securities of Act of 1933 and the
Securities Exchange Act of 1934.
ARTICLE VI
CONDITIONS TO OBLIGATIONS
6.1 CONDITIONS TO DIALOG SHAREHOLDERS' OBLIGATIONS. The obligation of
the Dialog Shareholders to sell the Dialog Stock pursuant to the provisions of
this Agreement shall be subject to the satisfaction at or before the Closing of
the following conditions, which may be waived in writing in whole or in part by
the Dialog Shareholders' Representative:
(a) COVENANTS. Each of Medscape and MAC shall have performed and complied in
all material respects with their covenants and agreements contained herein
and
<PAGE>
the Dialog Shareholders' Representative shall have received a certificate
to this effect from each of the Medscape and MAC.
(b) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties
of Medscape contained in Article lIl of this Agreement and of MAC contained
in Article IV of this Agreement shall have been true, correct and complete
in all material respects as of the date hereof; all such representations
and warranties shall be true, correct and complete in all material respects
at and as of the Closing Date, and the Dialog Shareholders' Representative
shall have received a certificate to this effect from each of Medscape and
MAC.
(c) OTHER DOCUMENTS. Each of Medscape and MAC shall have executed and delivered
each agreement, certificate document or other instrument referenced in
Sections 1.10(b) and (c) required to be executed by it.
(d) SECRETARY CERTIFICATE. Each of Medscape and MAC shall have delivered to the
Dialog Shareholders' Representative a certificate of the secretary of
Medscape or MAC, as applicable, certifying as to requisite corporate or
other action authorizing the transactions contemplated by this Agreement
and the incumbency of officers and directors.
(e) NO INJUNCTION. No Governmental Entity of competent jurisdiction shall have
enacted, issued, promulgated or enforced any statute, rule, regulation,
executive order, decree, judgment, preliminary or permanent injunction or
other order which is in effect and which prohibits, enjoins or otherwise
restrains the consummation of the transactions contemplated hereby;
(f) MERGER CERTIFICATE. Medscape shall have executed and delivered the Merger
Certificate referred to in Section 1.2.
(g) Stockholder Approval. The Merger shall have been duly approved by consent
of the stockholders on the terms and conditions set out in this Agreement.
<PAGE>
(h) Waiver of a Contribution or Indemnification for Payments. Each of the
Dialog Shareholders and each of the Non-founding Dialog Shareholders shall
have executed a waiver in compliance with Section 7.7.
6.2 _ CONDITIONS TO MEDSCAPE AND MAC'S OBLIGATIONS. The obligation of
Medscape and MAC to consummate the transactions contemplated by this Agreement
are subject to the satisfaction at or before the Closing of the following
conditions, which may be waived in writing in whole or in part by Medscape and
MAC: (a) COVENANTS. The Dialog Parties shall have performed and complied in all
material respects with their covenants and agreements contained herein and
Medscape and MAC shall have received a certificate to this effect from each of
the Dialog Shareholders.
(b) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties
of the Dialog Parties contained in Article ll of this Agreement shall have
been true, correct and complete in all material respects as of the date
hereof; all such representations and warranties shall be true, correct and
complete in all material respects at and as of the Closing Date, and
Medscape and MAC shall have received a certificate to this effect from the
Dialog Parties.
(c) CONSENTS; PHYSICIANS' CONTRACTS. The Dialog Parties shall have obtained
consents from all third parties which are required to be obtained in
connection with the transactions contemplated by this Agreement, including
any consents to assignment of any Contract to which Dialog is a party where
the transfer of the Dialog Stock to MAC may be deemed an assignment of such
Contract, and all such consents shall be in full force and effect. All
Physicians' Contracts shall have expired or been duly terminated in
accordance with their respective terms.
(d) OTHER DOCUMENTS. The applicable Dialog Parties shall have executed and
delivered each agreement, certificate document or other instrument
referenced in Sections 1.10(a) required to be executed by him or it.
<PAGE>
(e) SECRETARY CERTIFICATE; GOOD STANDING CERTIFICATE. Dialog shall have
delivered to Medscape and MAC a certificate of the secretary of Dialog
certifying as to requisite corporate or other action authorizing the
transactions contemplated by this Agreement, the incumbency of officers and
directors, and the status of record ownership of Dialog's shareholders,
together with a certificate of good standing issued by the Secretary of
State of Delaware with respect to Dialog dated as of the Closing Date.
(f) BANK ACCOUNTS. Dialog shall have delivered to Medscape and MAC
documentation necessary to change the authorized signatories for Dialog's
bank and brokerage accounts, as specified by Medscape and MAC.
(g) MERGER CERTIFICATE. Dialog shall have executed and delivered the Merger
Certificate referred to in Section 1.2.
(h) NO INJUNCTION. No Governmental Entity of competent jurisdiction shall have
enacted, issued, promulgated or enforced any statute, rule, regulation,
executive order, decree, judgment, preliminary or permanent injunction or
other order which is in effect and which prohibits, enjoins or otherwise
restrains the consummation of the transactions contemplated hereby.
(i) Approvals. The Merger shall have been duly approved by the Board of
Directors of Medscape.
(j) Tender of Shares. All the Dialog stockholders shall tender their shares at
the time of Closing.
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNIFICATION BY DIALOG SHAREHOLDERS. Each of the Dialog
Shareholders jointly and severally, agrees promptly to indemnify, defend and
hold
<PAGE>
harmless the Surviving Corporation and Medscape from and against any and all
assessments, judgments, debts, obligations, liabilities, losses, costs, damages
or expenses (including interest, penalties and reasonable out-of-pocket fees,
expenses and disbursements in connection with any action, suit or proceeding)
net of insurance proceeds actually received (collectively, "DAMAGES"), suffered,
paid or incurred by MAC, the Surviving Corporation or Medscape resulting from or
caused by or arising out of any breach of the representations and warranties
made by any Dialog Shareholder to MAC, the Surviving Corporation and Medscape in
this Agreement or in any Schedule hereto or any certificate delivered hereunder.
In addition, each of the Dialog Shareholders jointly and severally agrees
promptly to indemnify, defend and hold harmless the Surviving Corporation and
Medscape from and against any and all Damages suffered, paid or incurred by the
Surviving Corporation, Medscape or Dialog resulting from or caused by or arising
out of any failure by such Dialog Shareholder to perform any of his covenants or
agreements contained in this Agreement.
7.2 Limitations/Dialog Shareholders. The Dialog Shareholders's
liability shall in no event exceed $3,000,000 (THREE MILLION DOLLARS).
Further,the Dialog Shareholders shall not be under any liability or claim
arising under this Agreement that shall accrue to Medscape under this Agreement
hereof unless and except to the extent that the liability of Medscape would in
respect of any single claim exceed $100,000 (ONE HUNDRED THOUSAND DOLLARS)
except:
(a) to the extent that the liability of Medscape would in respect of any single
claim under Section 2.11 exceed $25,000 (TWENTY-FIVE THOUSAND DOLLARS)
(b) to the extent that the liability of Medscape would in respect of any single
claim under Section 2.20 exceed $50,000 (FIFTY THOUSAND DOLLARS)
(c) that the Dialog Shareholders shall be fully liable for any liability or
claim arising under this Agreement under Section 2.24.
<PAGE>
7.3 INDEMNIFICATION BY THE SURVIVING CORPORATION. The Surviving
Corporation agrees to indemnify and hold harmless the Dialog Shareholders from
and against any and all Damages suffered, paid or incurred by any Dialog
Shareholder resulting from or caused by or arising out of: (i) any breach of the
representations and warranties made by MAC in this Agreement or any certificate
delivered hereunder and (ii) any failure by MAC to perform any covenant or
agreement of MAC contained in this Agreement. In no event shall the liability to
the Surviving Corporation exceed $3,000,000 (THREE MILLION DOLLARS).
7.4 INDEMNIFICATION BY MEDSCAPE. Medscape agrees to indemnify and
hold harmless the Dialog Shareholders from and against any and all Damages
suffered, paid or incurred by any Dialog Shareholder resulting from or caused by
or arising out of: (i) any breach of the representations and warranties made by
Medscape in this Agreement or any certificate delivered hereunder and (ii) any
failure by Medscape to perform any covenant or agreement of Medscape contained
in this Agreement. In no event shall the liability to the Dialog Shareholders
exceed $3,000,000 (THREE MILLION DOLLARS).
7.5 INDEMNITY PROCEDURE FOR THIRD PARTY CLAIMS. Promptly after
receipt by a party seeking indemnification hereunder (an "INDEMNIFIED PARTY") of
notice of any claim or the commencement by any third party of any action, suit
or proceeding which might result in the other party hereto (the "INDEMNIFYING
PARTY") becoming obligated to indemnify or make any other payment to the
Indemnified Party under this Agreement, the Indemnified Party shall notify the
Indemnifying Party forthwith in writing of the commencement thereof or of the
claim, and shall furnish the Indemnifying Party with all information and
documents relating thereto promptly after its receipt thereof. The failure of
the Indemnified Party to so notify the Indemnifying Party shall not relieve the
Indemnifying Party from any liability which it may have on account of this
indemnification or otherwise, except and only to the extent that the
Indemnifying Party is
<PAGE>
materially prejudiced thereby. The Indemnifying Party shall have the right,
within thirty (30) days after being so notified, to assume and control the
defense of such claim, litigation or proceeding with counsel reasonably
satisfactory to the Indemnified Party in good faith and at the Indemnifying
Party's own expense; provided that unless and until the Indemnifying Party shall
assume such defense pursuant to this sentence, the Indemnified Party shall have
the right to conduct and control the defense of such claim, litigation or
proceeding (including the settlement thereof upon Dialog's consent) without the
Indemnifying Party's consent and shall be entitled to payment from the
Indemnifying Party of all reasonable costs of such defense (including attorney's
fees and expenses). In any such claim, litigation or proceeding the defense of
which the Indemnifying Party shall have so assumed, the Indemnified Party shall
have the right to participate therein and retain its own counsel at its own
expense, unless (i) the Indemnifying Party and the Indemnified Party shall have
mutually agreed to the retention of the same counsel or (ii) the named parties
to any such litigation or proceeding (including impleaded parties) include both
the Indemnifying Party and the Indemnified Party, and representation of such
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them; in the case of clause (ii) above, such
separate counsel may be retained by the Indemnified Party at the expense of the
Indemnifying Party. The Indemnifying Party may elect to settle any claim, action
or proceeding defended by it without the written consent of the Indemnified
Party provided that such settlement is limited to payment of monetary damages
which are payable in full by the Indemnifying Party and the Indemnified Party is
fully discharged at the time of the settlement from any liability with respect
to the claim, action or proceeding, and the Indemnified Party shall not admit
any liability with respect thereto or settle, compromise, pay or discharge the
same without the prior written consent of the Indemnifying Party so long as the
Indemnifying Party is controlling or defending such claim in good faith. The
Indemnifying Party may not enter into any settlement that is not limited to
payment of
<PAGE>
monetary damages without the Indemnified Party's prior written consent which
will not be unreasonably withheld. Each of the Dialog Shareholders, Medscape and
the Surviving Corporation covenant to use all reasonable efforts to cooperate
fully with respect to the defense of any claim, action or proceeding covered by
this Section 7.5. At the option of the Dialog Shareholders, they shall have the
right to tender the shares issued as the Merger Consideration in lieu of a cash
payment.
7.6 TAX INDEMNIFICATION. (a) Without regard to any other limitation on
liability set forth in the Agreement, after the Closing Date, the Dialog
Shareholders, jointly and severally, will fully indemnify, defend and hold
harmless the Surviving Corporation and Medscape from and against any and all
Damages resulting from, arising out of or relating to Taxes for periods ending
on or before the Closing, or for any Taxes not disclosed in SCHEDULE 2.9,
imposed on Dialog or the Surviving Corporation for, or resulting from the denial
of any deduction or credit claimed for, any taxable period ending on or before
the Closing Date.
(b) This Section 7.6 shall remain in force for the period described in
Section 9.6 of the Agreement.
7.7 WAIVER OF RIGHT TO CONTRIBUTION. Each Dialog Shareholder and
Non-Founding Dialog Shareholder hereby waives, effective as of the Closing Date,
any rights which such shareholder may have against the Surviving Corporation in
connection with any contribution or indemnification for payments made after the
Closing Date pursuant to this Agreement or otherwise.
7.8 SOLE REMEDY. In the event of a breach of a representation or
warranty or covenant hereunder, the remedy of the beneficiary of such
representation or warranty or covenant shall be limited solely to the indemnity
set forth in this Article VII.
<PAGE>
ARTICLE VIII
TERMINATION; WAIVER
8.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual consent of Medscape, MAC and the Dialog Parties;
(b) by Medscape and MAC or by the Dialog Parties if the Closing shall not
have occurred on or before March 31, 2000, unless the failure of the
Closing to occur by such date shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe the covenants
or agreement of such party set forth herein;
(c) by Medscape or MAC if there has been a material misrepresentation or
material breach of the representations, warranties, covenants or
obligations of any of the Dialog Parties set forth herein, PROVIDED
that in the case of a breach of any such covenant or obligation, such
breach has not been cured within ten (10) business days after Medscape
and MAC have notified the Dialog Shareholders' Representative of such
breach; or
(d) by the Dialog Parties if there has been a material misrepresentation or
material breach of the representations, warranties, covenants or
obligations of either Medscape or MAC set forth herein, PROVIDED that
in the case of a breach of any such covenant or obligation, such breach
has not been cured within ten (10) business days after the Dialog
Shareholders' Representative has notified Medscape or MAC, as
applicable, of such breach.
The power of termination provided for by this Section 8.1 will be effective only
after written notice thereof shall have been given to the other parties. If this
Agreement is terminated in accordance with this Section 8.1, this Agreement and
the transactions contemplated hereby shall be abandoned without further action
by the parties.
<PAGE>
8.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to Section 8.1, this Agreement shall forthwith become null
and void and have no effect, and no party shall have any liability or obligation
of any nature whatsoever hereunder, or in connection with the transactions
contemplated hereby, except (a) Section 5.1 (Confidential Information) and
Section 5.8 (Expenses) shall survive any termination of this Agreement.
8.3 EXTENSION; WAIVER. At any time prior to the Closing Date, the
parties hereto may, subject to Section 9.4 below, (a) extend the time for the
performance of any of the obligations or other acts of the parties hereto, (b)
waive any inaccuracies in the representations and warranties contained herein or
in any document delivered pursuant hereto and (c) waive compliance with any of
the agreements or conditions hereto.
ARTICLE IX
MISCELLANEOUS
9.1 EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated hereby (i)
incurred by either Medscape or MAC shall be paid by Medscape and (ii) incurred
by the Dialog Parties shall be paid by the Dialog Party incurring such expenses.
The Dialog Shareholders shall not charge any such expenses to Dialog.
9.2 INTERPRETATION. When a reference is made in this Agreement to a
Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or
Exhibit of this Agreement unless otherwise indicated. The table of contents and
caption headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words
<PAGE>
"included," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." All accounting terms
not defined in this Agreement shall have the meanings determined by GAAP.
9.3 FURTHER ASSURANCES. Each of the parties hereto covenants and agrees
to take any and all such further action and to execute, acknowledge and deliver
such instruments, documents and agreements as any other party may reasonably
request to effectuate, consummate or confirm the transactions contemplated
hereby.
9.4 AMENDMENT AND WAIVER. This Agreement may be amended only in a
writing signed by the Dialog Parties (or the Dialog Shareholders' Representative
acting on their behalf), MAC and Medscape. Any provision of this Agreement may
be waived by the party entitled to the benefit thereof only in a writing
executed by the party against whom such waiver is sought to be enforced. No
waiver shall be deemed a waiver of any other provision of this Agreement, and no
waiver of a breach hereunder shall be deemed a waiver of, or operate as an
estoppel with respect to, any other or subsequent breach of this Agreement.
9.5 NOTICE. All notices, demands and other communications to be given
or delivered hereunder shall be in writing and will be deemed to have been given
if personally delivered or sent by overnight courier (in each such case delivery
will be effective upon receipt) or by confirmed facsimile to the addresses
indicated below or to such other addresses as the parties may specify on notice
as herein provided:
If to MAC or the Surviving Corporation, to:
Medscape, Inc.
134 West 29th Street
New York, New York 10001
Fax: (212) 760-3140
Attention: Legal Department
with a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
<PAGE>
New York, New York 10036-6710
Fax: (212) 336-2222
Attention: John P. Schmitt, Esq.
If to Medscape, to:
Medscape, Inc.
134 West 29th Street
New York, New York 10001
Fax: (212) 760-3140
Attention: Legal Department
with a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036-6710
Fax: (212) 336-2222
Attention: John P. Schmitt, Esq.
If to the Dialog Shareholders, to:
Michael J. Burke
Sellers' Representative
2915 Capot Ct.
Lithonia, Georgia 30058
Fax: (770) 736-5725
Attention:
with a copy to:
Long, Aldridge & Norman LLP
303 Peachtree Street
Suite 5300
Atlanta, Georgia 30308
Attn: Charles E. Wilson, Esq.
9.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
Notwithstanding any investigation by any party hereto, each of the
representations and warranties of the parties and the related indemnification
obligations that are set forth in this Agreement or in any certificate delivered
hereunder shall survive the Closing Date
<PAGE>
until the first anniversary of the Closing Date (the "EXPIRATION DATE") except
those representations and warranties contained in Section 2.4, Section 3.3 and
Section 4.3 (Capitalization) which shall survive indefinitely and Section 2.9
(Taxes), Section 2.11 (Labor and Employee Benefit Matters) and Section 2.16
(Environmental Compliance) which shall remain in force until the expiration of
the applicable statute of limitations, and further respect to Resource Version
3.0, the indemnity obligation shall survive until the first anniversary of the
release of Resource Version 3.0; provided, however, that delivery by one party
to the other of notice of a breach of any representation or warranty, specifying
the breach in reasonable detail, on or prior to the Expiration Date, or the
expiration of the applicable statute of limitations, as the case may be, shall
be deemed to preserve such party's claim solely with respect to that particular
breach of representation and warranty. Those covenants contained in this
Agreement that contemplate or may involve actions to be taken or obligations in
effect after the Closing Date shall survive the Closing Date until the
expiration of the applicable statute of limitations.
9.7 BINDING AGREEMENT; ASSIGNMENT. This Agreement and all of the
provisions hereof will be binding upon and inure to the benefit of the parties
hereto and their respective successors. The Dialog Shareholders may not assign
their rights or delegate their duties hereunder without the prior written
consent of MAC and Medscape, which consent may be granted, withheld or
conditioned in the sole and absolute discretion of MAC and Medscape.
9.8 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
<PAGE>
9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which need not contain signatures of more than one party,
but all such counterparts taken together will constitute one and the same
instrument. Signatures may be exchanged by facsimile, with original signatures
to immediately follow by overnight courier. Each party to this Agreement agrees
that it will be bound by his or its own signature delivered by facsimile and
that he or it accepts the signatures of the other parties to this Agreement
delivered by facsimile.
9.10 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York, without reference
to the choice of law provisions thereof.
9.11 REMEDIES. All rights, remedies or powers hereby conferred shall,
to the extent not prohibited by law, be deemed cumulative and not exclusive of
any other thereof, or of any other rights, remedies or powers available. No
single or partial exercise of any right, remedy or power by a party shall
preclude further exercise thereof. No delay or omission to exercise any right,
power or remedy accruing to a party upon the occurrence of any breach of any
warranty, covenant or agreement contained in this Agreement shall impair any
such right, power or remedy or be construed to be a waiver of any such breach or
any acquiescence therein or to any similar breach thereafter occurring.
9.12 PUBLIC ANNOUNCEMENTS. No public announcement concerning the
transactions contemplated hereby may be made by any party without the consent of
the others except as may be required by law or the rules of any applicable
securities exchange.
9.13 ENTIRE AGREEMENT. This Agreement (including the Exhibits,
Schedules, documents and instruments referred to herein) constitutes the entire
agreement and understanding of the parties hereto and thereto with respect to
the subject matter hereof and thereof and supersedes all other prior agreements
and
<PAGE>
understandings, both written or oral, between such parties with respect to
the subject matter hereof and thereof.
9.14 Schedules. Notwithstanding Section 9.13, the Schedules attached
hereto may be amended by either party and are subject to approval by each party
prior to the Closing. Further, anything contained in any single Schedule shall
be considered disclosed for all purposes of the Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered on their behalf as of the day and year first above
written.
MEDSCAPE, INC.
By:_________________________
Name:
Title:
MEDLOG ACQUISITION INC.
By:_________________________
Name:
Title:
-------------------------
MICHAEL J. BURKE
-------------------------
JAMES E. GOTTESMAN, M.D.,
-------------------------
NEIL H. BAUM, M.D.
MEDSCAPE CONFIDENTIAL DRAFT
1/26/00
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION
IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SUCH ACT.
WARRANT TO PURCHASE
COMMON STOCK
OF
MEDSCAPE, INC.
VOID AFTER DECEMBER 16, 2004
WARRANT NO. 1
This Warrant is issued to Lazard Freres & Co. LLC or its
registered assigns ("Holder") by Medscape, Inc., a Delaware corporation (the
"Company"), on February 15, 2000 (the "Warrant Issue Date").
1. PURCHASE SHARES. Subject to the terms and conditions hereinafter set
forth, the Holder is entitled, upon surrender of this Warrant at the principal
office of the Company (or at such other place as the Company shall notify the
holder hereof in writing), to purchase from the Company up to 100,000 fully paid
and nonassessable shares of Common Stock, par value $.01 per share, of the
Company, as constituted on the Warrant Issue Date (the "Common Stock"). The
number of shares of Common Stock issuable pursuant to this Section 1 (The
"Shares") shall be subject to adjustment pursuant to Section 9 hereof.
2. EXERCISE PRICE. The purchase price for the Shares shall be $9.3125
per share, as adjusted from time to time pursuant to Section 9 hereof (the
"Exercise Price").
3. EXERCISE PERIOD. This Warrant shall be exercisable, in whole or in
part, during the term commencing on the Warrant Issue Date and ending at 5:00
p.m. New York time on December 16, 2004; provided, however, that in the event of
a termination by Holder of its engagement letter with the company dated December
16, 1999 prior to June 16, 2000 for any reason other than a material breach of
the terms of that engagement letter by Company.
4. METHOD OF EXERCISE. While this Warrant remains outstanding and
exercisable in accordance with Section 3 above, the Holder may exercise, in
whole or in part, the purchase rights evidenced hereby. Such exercise shall be
effected by:
1
<PAGE>
(a) the surrender of the Warrant, together with a duly executed
copy of the form of Notice of Election attached hereto, to the Secretary of the
Company at its principal offices; and
(b) the payment to the Company of an amount equal to the
aggregate Exercise Price for the number of Shares being purchased.
5. NET EXERCISE. In lieu of exercising this Warrant pursuant to Section
4, the Holder may elect to receive, without the payment by the Holder of any
additional consideration, shares of Common Stock equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the company together with notice of such election, in
which event the Company shall issue to the Holder hereof a number of shares of
Common Stock computed using the following formula:
Y(A - B)
--------
X = A
Where: X = The number of shares of Common Stock to be issued
to the Holder pursuant to this net exercise;
Y = The number of Shares in respect of which the net
issue election is made;
A = The fair market value of one share of the Common
Stock at the time the net issue election is made;
B = The Exercise Price (as adjusted to the date of the
net issuance).
For purposes of this Section 5, the fair market value of one share of Common
Stock (or, to the extent all such Common Stock has been redesignated into the
Company's Common Stock) as of a particular date shall be determined as follows:
(i) if traded on a securities exchange or through the Nasdaq National Market,
the value shall be deemed to be the average of the closing prices of the
securities on such exchange over the thirty (30) day period ending three (3)
days prior to the net exercise election; (ii) if traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the net exercise; and (iii) if there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by the
Board of Directors of the Company.
6. REPRESENTATIONS AND WARRANTIES OF HOLDER. The Holder hereby
represents and warrants that:
(a) AUTHORIZATION. The Holder has full power and authority to enter
into this Warrant, and this Warrant constitutes its valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
(b) PURCHASE ENTIRELY FOR OWN ACCOUNT. This Warrant is being issued
to such Holder in reliance upon such Holder's representation to the Company,
which by such Holder's execution of this Warrant such Holder hereby confirms,
that this Warrant, the Common Stock to be received by such Holder upon exercise
of this Warrant and the Common Stock issuable upon redesignation thereof
(collectively, the "Securities") will be acquired for investment for such
Holder's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such
2
<PAGE>
Holder has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Warrant, such Holder further
represents that such Holder does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
(c) DISCLOSURE OF INFORMATION. Such Holder further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Securities and the
business, properties, prospects and financial condition of the Company.
(d) INVESTMENT EXPERIENCE. Such Holder is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Securities. If other than an
individual, Holder also represents it has not been organized for the purpose of
acquiring the Securities.
(e) ACCREDITED INVESTOR. Such Holder is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
(f) RESTRICTED SECURITIES. Such Holder understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, such Holder
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
(g) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, such Holder further agrees not to make any
disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 6, provided and to the extent this Section is then applicable, and:
(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration statement; or
(ii) (A) Such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (B) if
reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company that
such disposition will not require registration of such securities under the Act.
It is agreed that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144 except in unusual circumstances.
(iii) Notwithstanding the provisions of Paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a Holder (A) that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, or (B) to any entity that is controlled by, controls or is under common
control
3
<PAGE>
with the Holder, if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if he or she were an original Holder hereunder.
(h) LEGENDS. It is understood that the certificates evidencing
the Securities will bear a legend in substantially the following form:
"These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
7. CERTIFICATES FOR SHARES. Upon the exercise of the purchase rights
evidenced by this Warrant, one or more certificates for the number of Shares so
purchased shall be issued as soon as practicable thereafter (with appropriate
restrictive legends, if applicable), and in any event within thirty (30) days of
the delivery of the subscription notice.
8. ISSUANCE OF SHARES. The Company hereby represents and warrants that
it has full power and authority to enter into this Warrant, and this Warrant
constitutes its valid and legally binding obligation, enforceable in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies. The Company covenants that the Shares, when issued pursuant
to the exercise of this Warrant, will be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens, and charges with respect to the
issuance thereof.
9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number of and
kind of securities purchasable upon exercise of this Warrant and the Exercise
Price shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the
Company shall at any time prior to the expiration of this Warrant subdivide its
Common Stock, by split-up or otherwise, or combine its Common Stock, or issue
additional shares of its Common Stock as a dividend with respect to any shares
of its Common Stock, the number of Shares issuable on the exercise of this
Warrant shall forthwith be proportionately increased in the case of a
subdivision or stock dividend, or proportionately decreased in the case of a
combination. Appropriate adjustments shall also be made to the purchase price
payable per share, but the aggregate purchase price payable for the total number
of Shares purchasable under this Warrant (as adjusted) shall remain the same.
Any adjustment under this Section 9(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective, or as of
the record date of such dividend, or in the event that no record date is fixed,
upon the making of such dividend.
(b) RECLASSIFICATION, REORGANIZATION AND CONSOLIDATION. In case
of any reclassification, capital reorganization, or change in the Common Stock
of the Company (other than as a result of a subdivision, combination, or stock
dividend provided for in Section 9(a) above), then as a condition of such
reclassification, reorganization, or change, lawful provision shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the Holder, so that the Holder shall have the right at any
time prior to the expiration of this Warrant to purchase, at a total price equal
to that payable upon the exercise of this Warrant, the kind and amount of shares
of stock and other securities and property receivable in connection with such
reclassification, reorganization, or change by a holder of the same number of
shares of Common Stock as were
4
<PAGE>
purchasable by the Holder immediately prior to such reclassification,
reorganization, or change. In any such case appropriate provisions shall be made
with respect to the rights and interest of the Holder so that the provisions
hereof shall thereafter be applicable with respect to any shares of stock or
other securities and property deliverable upon exercise hereof, and appropriate
adjustments shall be made to the purchase price per share payable hereunder,
provided the aggregate purchase price shall remain the same.
(c) NOTICE OF ADJUSTMENT. When any adjustment is required to be
made in the number or kind of shares purchasable upon exercise of the Warrant,
or in the Warrant Price, the Company shall promptly notify the holder of such
event and of the number of shares of Common Stock or other securities or
property thereafter purchasable upon exercise of this Warrant.
10. NO FRACTIONAL SHARES OF SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares the Company shall make a cash
payment therefor on the basis of the Exercise Price then in effect.
11. NO STOCKHOLDER RIGHTS. Prior to exercise of this Warrant, the
Holder shall not be entitled to any rights of a stockholder with respect to the
Shares, including (without limitation) the right to vote such Shares, receive
dividends or other distributions thereon, exercise preemptive rights or be
notified of stockholder meetings, and such holder shall not be entitled to any
notice or other communication concerning the business or affairs of the Company
other than as contemplated herein. However, nothing in this Section 11 shall
limit the right of the Holder to be provided the Notices required under this
Warrant.
12. TRANSFERS OF WARRANT. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable in whole or in part by the Holder to any person or entity upon
written notice to the Company. The transfer shall be recorded on the books of
the Company upon the surrender of this Warrant, properly endorsed, to the
Company at its principal offices, and the payment to the Company of all transfer
taxes and other governmental charges imposed on such transfer. In the event of a
partial transfer, the Company shall issue to the holders one or more appropriate
new warrants.
13. REGISTRATION RIGHTS. (a) If the Company proposes to file a
registration statement under the Securities Act of 1933, as amended, with
respect to an offering by the Company for its own account or, to the extent
permitted under applicable registration rights agreements, for the account of
any of its security holders of any class of equity security (other than (i) a
registration statement on a form which would not otherwise permit the sale by
the Holders or any other publicly registered offering pertaining to the issuance
of shares of capital stock under any benefit plan or (ii) a registration
statement in connection with an exchange offer or offering to the Company's
existing security holders), then the Company shall give written notice of such
proposed filing to the Holders of the Securities as soon as practicable (but in
no event less than 15 business days before the anticipated filing date), and
such notice shall offer such Holders the opportunity to register such number of
Registrable Securities (as defined below) as each such Holder may request. For
purposes of this Section 13 "Registrable Securities" shall mean the Common Stock
and any other securities issuable upon exercise of the Warrants.
(b) The Company shall use its best efforts to cause the
managing underwriter or underwriters (the "UNDERWRITERS") of a proposed
underwritten offering to permit the Registrable Securities requested to be
included in the registration statement for such offering to be included in the
amount requested and on not less favorable terms and conditions as any similar
securities of the Company or of such other security holders included therein.
Notwithstanding the foregoing, if the managing Underwriter or Underwriters of
such offering deliver a written opinion to the Company that either because of
(i) the kind or combination of securities which the Holders, the Company and any
other persons or entities
5
<PAGE>
intend to include in such offering or (ii) the size of the offering which the
Holders, the Company and such other persons intend to make, are such that the
success of the offering would be materially adversely affected by the requested
inclusion of the Registrable Securities requested to be included, then (a) in
the event that the size of the offering is the basis of such managing
Underwriter's opinion, the amount of securities to be offered for the accounts
of Non-Priority Persons (as defined below) shall be reduced pro rata (according
to the Registrable Securities and other securities proposed for registration by
Persons ("NON-PRIORITY PERSONS") other than (x) the Company (if such
registration was initially to be filed for the account of the Company), (y) the
other Persons for whose account such registration was initially to be filed or
(z) other stockholders of the Company which have exercised registration rights
pursuant to registration rights existing prior to the Warrant Issue Date,
including that certain Amended and Restated Stockholders' Agreement dated March
5, 1999 by and between the Company and the Stockholders (as defined therein), as
the same may be amended from time to time, and registration rights originally
granted to CBS Corporation) to the extent necessary to reduce the total amount
of securities to be included in such offering to the amount recommended by such
managing Underwriter or Underwriters; PROVIDED that if securities are being
offered for the account of Non-Priority Persons other than holders of
Registrable Securities, then with respect to the Registrable Securities intended
to be offered by Holders, the proportion by which the amount of such class of
securities intended to be offered by Holders is reduced shall not exceed the
proportion by which the amount of such class of securities intended to be
offered by Non-Priority Persons other than holders of Registrable Securities is
reduced; and (b) in the event that the kind (or combination) of securities to be
offered is the basis of such managing Underwriter's opinion, (x) the Registrable
Securities to be included in such offering shall be reduced as described in
clause (a) above (subject to the proviso in clause (a)) or (y) if the actions
described in clause (x) would, in the judgment of the managing Underwriter, be
insufficient to substantially eliminate the adverse effect that the requested
inclusion of the Registrable Securities would have on such offering, such
Registrable Securities will be excluded from such offering.
(c) INDEMNIFICATION AND CONTRIBUTION.
(i) INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless each Holder of Registrable Securities, its officers,
directors, employees and agents and each Person who controls such Holder within
the meaning of either Section 15 of the Securities Act of 1933, as amended, or
Section 20(a) of the Securities Exchange Act of 1934, as amended (each such
Person being sometimes hereinafter referred to as an "INDEMNIFIED HOLDER") from
and against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and reasonable legal expenses) arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or prospectus or in any amendment
or supplement thereto or in any preliminary prospectus, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(collectively, a "Violation"), except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or allegation thereof (x) based upon information relating to such
Indemnified Holder and furnished in writing to the Company by such Indemnified
Holder expressly for use therein or (y) that is corrected in any amendment or
supplement to the prospectus that was made available prior to the subject sale.
This indemnity will be in addition to any liability which the Company may
otherwise have. The Company shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if settled with
its written consent, or if there be a final judgment for the plaintiff in any
such action or proceeding, the Company agrees to indemnify and hold harmless
such Indemnified Holders from and against any loss or liability by reason of
such settlement or judgment to the extent set forth herein.
6
<PAGE>
(ii) INDEMNIFICATION BY THE HOLDERS. Each Holder of Registrable
Securities agrees to indemnify and hold harmless the Company, its officers,
directors, employees and agents and each Person who controls the Company (the
"Related Persons") within the meaning of either Section 15 of the Securities Act
of 1933, as amended, or Section 20(a) of the Securities Exchange Act of 1934, as
amended, (and any underwriter and any other selling security holder under the
registration statement and their respective Related Persons) from and against
all losses, claims, damages, liabilities and expenses (including reasonable
costs of investigation and reasonable legal expenses) arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or based
upon any Violation, in each case to the extent that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; provided, that,
in no event shall any indemnity under this Section 14(c)(ii) exceed the net
proceeds from the offering received by such Holder. This indemnity will be in
addition to any liability which the Holder may otherwise have. Any Holder shall
not be liable for any settlement of any such action or proceeding effected
without its written consent, but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the Holder agrees to indemnify and hold harmless the Company (and any
underwriter, other selling security holder or Related Person) from and against
any loss or liability by reason of such settlement or judgment to the extent set
forth herein.
(iii) PROCEDURE. If any action or proceeding (including any
governmental investigation or inquiry) shall be brought or asserted against an
indemnified party in respect of which indemnity may be sought from an
indemnifying party, such indemnified party shall promptly notify the
indemnifying party in writing, and the indemnifying party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such indemnified party and the payment of all reasonable expenses. Such
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of such indemnified party except that the
indemnifying party shall be responsible for the reasonable fees and expenses of
such counsel if (but only if) (a) the indemnifying party has agreed to pay such
fees and expenses or (b) the indemnifying party shall have failed to assume the
defense of such action or proceeding or has failed to employ counsel reasonably
satisfactory to such indemnified party in any such action or proceeding or (c)
the named parties to any such action or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
there are one or more legal defenses available to such indemnified party which
are different from or additional to those available to the indemnifying party
(in which case, if such indemnified party notifies the indemnifying party in
writing that it elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such action or proceeding on behalf of such indemnified party, it
being understood, however, that the indemnifying party shall not, in connection
with any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys at any time for such indemnified party
and any other indemnified party, which firm shall be designated in writing by
such indemnified party). In any case where an indemnified party shall be
entitled to employ separate counsel, such indemnified party and their counsel
shall cooperate with the indemnifying party and its counsel in the defense of
any such action or proceeding.
(iv) CONTRIBUTION. If the indemnification provided for in
paragraph (c)(i) or (ii) is unavailable to an indemnified party in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
the indemnifying party, in lieu of indemnifying such indemnified party, shall
7
<PAGE>
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of the indemnifying party on the one hand and of the
indemnified party on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim. The Company and each Holder of Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this paragraph (iv)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
paragraph (iv) an Indemnified Holder shall not be required to contribute any
amount in excess of the amount by which the total net proceeds received by such
Indemnified Holder or its affiliated Indemnified Holders from the sale to the
public of Registrable Securities exceeds the amount of any damages which such
Indemnified Holder, or its affiliated Indemnified Holders, have otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act of 1933, as amended) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
14. UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required to include any Holder's Registrable Securities in such
underwriting unless such Holder accepts the terms of the underwriting as agreed
upon between the Company and the underwriters. To the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with an underwritten public offering are in conflict
with Section 14, the provisions of the underwriting agreement shall control.
15. TERMINATION OF REGISTRATION RIGHTS. The Company's obligation to
effect a registration of Securities shall terminate with respect to any Holder
at such time that all the Registrable Securities held by such Holder may be sold
under Rule 144 during any 90-day period.
16. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant
shall inure to the benefit of, and be binding upon, the Company and the Holders
hereof and their respective successors and assigns.
17. AMENDMENTS AND WAIVERS. Any term of this Warrant may be amended and
the observance of any term of this Warrant may be waived (either generally or in
a particular instance and either retroactively or prospectively), with the
written consent of the Company and the Holder. Any waiver or amendment effected
in accordance with this Section shall be binding upon each holder of any Shares
purchased under this Warrant at the time outstanding (including securities into
which such Shares have been converted), each future holder of all such Shares,
and the Company.
18. NOTICES. All notices required under this Warrant and shall be
deemed to have been given or made for all purposes (i) upon personal delivery,
(ii) upon confirmation receipt that the communication was successfully sent to
the applicable number if sent by facsimile; (iii) one day after being sent, when
sent by professional overnight courier service, or (iv) five days after posting
when sent
8
<PAGE>
by registered or certified mail. Notices to the Company shall be sent to the
principal office of the Company (or at such other place as the Company shall
notify the Holder hereof in writing). Notices to the Holder shall be sent to the
address of the Holder on the books of the Company (or at such other place as the
Holder shall notify the Company hereof in writing).
19. ATTORNEYS' FEES. If any action of law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in addition
to any other relief to which it may be entitled.
20. CAPTIONS. The section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
21. GOVERNING LAW. This Warrant shall be governed by the laws of the
State of New York as applied to agreements among New York residents made and to
be performed entirely within the State of York.
9
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Warrant
and Warrant Agreement to be executed by their duly authorized officers on the
date first above written.
MEDSCAPE, INC.
By:
-----------------------
Name:
Title:
LAZARD FRERES & CO. LLC
By:
-----------------------
Name:
Title:
10
<PAGE>
NOTICE OF EXERCISE
To: MEDSCAPE, INC.
The undersigned hereby elects to [CHECK APPLICABLE SUBSECTION]:
________ (a) Purchase __________________ shares of Common Stock of
Company, Inc., pursuant to the terms of the attached
Warrant and payment of the Exercise Price per share
required under such Warrant accompanies this notice;
OR
________ (b) Exercise the attached Warrant for [all of the shares]
[__________ of the shares] [CROSS OUT INAPPLICABL PHRASE]
purchasable under the Warrant pursuant to the net exercise
provisions of Section 5 of such Warrant.
The undersigned hereby represents and warrants that the undersigned is
acquiring such shares for its own account for investment purposes only, and not
for resale or with a view to distribution of such shares or any part thereof.
WARRANTHOLDER:
------------------------------
By:
------------------------
[NAME]
Address:
------------------------
------------------------
Date:__________________
Name in which shares should be registered:
- -------------------------------------
11
Healthcare Communications Group, LLC
Medscape U.K. Limited
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-92521 of Medscape, Inc. on Form S-8 of our report dated February 4, 2000
appearing in this Annual Report on Form 10-K of Medscape, Inc. for the year
ended December 31, 1999.
March 10, 2000
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM REGISTRANT'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001014845
<NAME> Medscape
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,456
<SECURITIES> 36,363
<RECEIVABLES> 5,946
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,021
<PP&E> 8,841
<DEPRECIATION> (1,273)
<TOTAL-ASSETS> 85,335
<CURRENT-LIABILITIES> 11,147
<BONDS> 0
0
0
<COMMON> 447
<OTHER-SE> 73,741
<TOTAL-LIABILITY-AND-EQUITY> 85,335
<SALES> 0
<TOTAL-REVENUES> 11,156
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 49,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,203
<INCOME-PRETAX> (36,711)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,711)
<EPS-BASIC> (1.89)
<EPS-DILUTED> (1.89)
</TABLE>
